<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934 for the period ended JUNE 30, 1996
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934 for the transition period from ____ to ____.
Commission File No. 0-28218
AFFYMETRIX, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 77-0319159
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3380 CENTRAL EXPRESSWAY, SANTA CLARA, CALIFORNIA 95051
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408)522-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
COMMON SHARES OUTSTANDING ON JULY 15, 1996: 22,414,635
------------
Page 1 of 59
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AFFYMETRIX, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Condensed Balance Sheets at June 30, 1996 and December 31, 1995..... 3
Condensed Statements of Operations for the Three and Six Months
Ended June 30, 1996 and 1995.................................. 4
Condensed Statements of Cash Flows for the Six Months Ended June
30, 1996 and 1995............................................. 5
Notes to Condensed Financial Statements............................. 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition........................................ 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............ 26
Item 6. Exhibits and Reports on Form 8-K............................... 27
SIGNATURES.............................................................. 28
EXHIBIT INDEX........................................................... 29
Page 2 of 59
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AFFYMETRIX, INC.
CONDENSED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
<C> <C> <C>
ASSETS (unaudited) (Note)
Current assets:
Cash and cash equivalents $ 21,309 $ 2,481
Short-term investments 92,533 36,402
Accounts receivable 1,265 1,342
Inventories 1,550 670
Other current assets 652 260
----------- ------------
Total current assets 117,309 41,155
Net property and equipment 3,852 3,257
Other assets 140 140
----------- ------------
$ 121,301 $ 44,552
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities $ 4,228 $ 2,745
Deferred revenue 2,018 2,340
----------- ------------
Total current liabilities 6,246 5,085
Noncurrent portion of capital lease obligation 851 948
Shareholders' equity:
Convertible preferred stock 0 70,439
Common stock 156,529 2,717
Deferred compensation (2,078) (2,360)
Accumulated deficit (40,214) (32,516)
Other (33) 239
----------- ------------
Total shareholders' equity 114,204 38,519
----------- ------------
$ 121,301 $ 44,552
----------- ------------
----------- ------------
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
Page 3 of 59
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AFFYMETRIX, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
Product $ 436 $ 0 $ 457 $ 0
Contract and grant 1,863 1,212 3,258 2,066
------- ------- ------- -------
Total revenue 2,299 1,212 3,715 2,066
Cost and expenses:
Cost of product revenue 606 0 707 0
Research and development 4,234 3,103 8,310 5,421
General and administrative 1,901 979 3,550 1,712
------- ------- ------- -------
Total operating expenses 6,741 4,082 12,567 7,133
------- ------- ------- -------
Loss from operations (4,442) (2,870) (8,852) (5,067)
Interest income (expense), net 665 (9) 1,154 15
------- ------- ------- -------
Net loss $(3,777) $(2,879) $(7,698) $(5,052)
------- ------- ------- -------
------- ------- ------- -------
Net loss per share $(0.58) $(0.37) $(1.07) $(0.65)
------- ------- ------- -------
------- ------- ------- -------
Shares used in computing net loss
per share 6,564 7,811 7,188 7,811
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See accompanying notes.
Page 4 of 59
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AFFYMETRIX, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
Cash flows from operating activities: 1996 1995
-------- -------
<S> <C> <C>
Net loss $ (7,698) $(5,052)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,197 330
Amortization of investment premiums, net (637) 103
Loss on disposal of equipment 62 0
Change in operating assets and liabilities:
Accounts receivable 77 (291)
Inventories (880) 0
Other current assets (392) (143)
Other assets 0 (41)
Accounts payable and other accrued liabilities 1,553 1,063
Deferred revenue (322) 38
-------- -------
Net cash used in operating activities (7,440) (3,993)
Cash flows from investing activities:
Capital expenditures (1,236) (1,699)
Proceeds from the sale of short-term investments 12,460 2,707
Proceeds from maturities of short-term investments 2,157 0
Purchases of short-term investments (70,383) (3,511)
-------- -------
Net cash used in investing activities (57,002) (2,503)
Cash flows from financing activities:
Issuance of preferred/common stock 83,362 152
Principal payments on capital lease obligation (92) (84)
-------- -------
Net cash provided by financing activities 83,270 68
Net increase/(decrease) in cash and cash equivalents 18,828 (6,428)
Cash and cash equivalents at beginning of period 2,481 6,659
-------- -------
Cash and cash equivalents at end of period $ 21,309 $ 231
-------- -------
-------- -------
</TABLE>
See accompanying notes.
Page 5 of 59
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AFFYMETRIX, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1996
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six
month periods ended June 30, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996. For
further information, refer to the financial statements and notes thereto
included in the Registration Statement on Form S-1 filed on April 15, 1996,
as amended, by Affymetrix, Inc. ("Affymetrix" or the "Company").
DEVELOPMENT STAGE
Through March 31, 1996, the Company was in the development stage. In April
1996, the Company commenced commercial sales of the GeneChip system and an
HIV probe array for research use. Therefore, the Company is no longer
considered to be in the development stage.
REVENUE RECOGNITION
Contract and grant revenue is recorded as earned as defined within the
specific agreements. Payments received in advance under these arrangements
are recorded as deferred revenue until earned. Direct costs associated with
these contracts and grants are reported as research and development expense.
Product revenue is recognized upon shipment. Certain reserves are also
recorded upon product shipment.
PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share information is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Pro forma net loss per share $ (0.21) $ (0.16) $ (0.43) $ (0.29)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Page 6 of 59
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<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares used in computing pro forma
net loss per share (in thousands) 17,900 17,664 17,782 17,663
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
As of June 30, 1996 and December 31, 1995, debt securities held by the
Company are classified as available-for-sale and are carried at fair value
with unrealized gains and losses reported in shareholders' equity.
The following is a summary of available-for-sale securities as of December
31, 1995 (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government obligations: $ 38,115 $ 309 $ 27 $ 38,397
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Amounts included in:
cash equivalents $ 1,995 $ -- $ -- $ 1,995
short-term investments 36,120 309 27 36,402
---------- ---------- ---------- ----------
Total securities $ 38,115 $ 309 $ 27 $ 38,397
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The following is a summary of available-for-sale securities as of June 30, 1996
(in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government obligations: $ 101,189 $ 116 $ 108 $ 101,197
U.S. Corporate securities: 10,114 -- -- 10,114
---------- ---------- ---------- ----------
Total securities $ 111,303 $ 116 $ 108 $ 111,311
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Amounts included in:
cash equivalents $ 18,778 $ -- $ -- $ 18,778
short-term investments 92,525 116 108 92,533
---------- ---------- ---------- ----------
Total securities $ 111,303 $ 116 $ 108 $ 111,311
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Page 7 of 59
<PAGE>
The gross realized gains and gross realized losses on sales of
available-for-sale securities were immaterial for the year ended December 31,
1995 and six months ended June 30, 1996.
The following is a summary of the amortized cost and estimated fair value of
available-for-sale securities at June 30, 1996, by contractual maturity (in
thousands):
<TABLE>
<CAPTION>
Amortized cost Estimated fair value
-------------- --------------------
<S> <C> <C>
Mature in one year or less $ 51,823 $ 51,837
Mature after one year through three years 59,480 59,474
-------------- --------------------
Total $ 111,303 $ 111,311
-------------- --------------------
-------------- --------------------
</TABLE>
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- ------------
<S> <C> <C>
Raw material $ 252 $ 0
Work in process 93 0
Finished goods 1,205 670
---------- ------------
Total $ 1,550 $ 670
---------- ------------
---------- ------------
</TABLE>
4. SHAREHOLDERS' EQUITY
The Company's initial public offering on June 6, 1996 generated net proceeds
of approximately $83.0 million from the sale of 6.0 million shares. On July
5, 1996, the Company's underwriters purchased 153,000 shares pursuant to the
over-allotment option, for additional net proceeds of $2.1 million. The
Company had 22.3 million shares outstanding at June 30, 1996.
Page 8 of 59
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations as of June 30, 1996 and for the three and six month periods
ended June 30, 1996 and 1995 should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Registration Statement on Form S-1 filed
on April 15, 1996, as amended.
The following discussion contains forward-looking statements. Such statements
are subject to risks and uncertainties that could cause actual results to
differ materially from those projected, including the factors set forth below
under "Risk Factors". These forward looking statements speak only as of the
date hereof. The Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in the Company's expectations with
regard thereto or any change in events, conditions or circumstances on which
any such statement are based.
OVERVIEW
Affymetrix is developing GeneChip-TM- systems and related applications and
technologies for the acquisition, analysis and management of complex genetic
information. The business and operations of the Company were commenced in
1991 by Affymax N.V. ("Affymax") and were initially conducted within Affymax.
In March 1992, the Company was incorporated as a California corporation and
wholly-owned subsidiary of Affymax. In September 1993, the Company issued
equity securities through a private financing of approximately $21 million
that reduced Affymax' ownership to approximately 65%. In March 1995, Glaxo
plc, now Glaxo Wellcome plc ("Glaxo") acquired Affymax, including its then
majority ownership interest in Affymetrix. In August 1995, the Company issued
equity securities through a second private financing of approximately $39
million, reducing Affymax' percentage ownership to approximately 46%. As a
result of the Company's initial public offering of approximately 6 million
shares in June 1996, Glaxo indirectly owns approximately 34% of Affymetrix.
The Company has a limited operating history that, to date, has focused
primarily on the development of its technology. Based on its GeneChip
technology platform, the Company is developing a portfolio of products for
academic research centers, pharmaceutical and biotechnology companies and
reference laboratories. The Company commercially introduced its first
product, the GeneChip system and the HIV probe array for research only, in
April 1996. Failure of the Company to successfully develop, manufacture and
market additional products over the next several years or to realize product
revenues would have a material adverse effect on the Company's business,
financial condition and results of operations.
Page 9 of 59
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Product revenue from the commercial launch of the GeneChip system and HIV
probe array was $436,000 and $457,000 for the three and six months ended June
30, 1996, respectively, compared to no product revenue in the three and six
months ended June 30, 1995. Contract and grant revenue increased to $1.9
million for the three months ended June 30, 1996 from $1.2 million for the
three months ended June 30, 1995. Contract and grant revenue increased 58% to
$3.3 million for the six months ended June 30, 1996 from $2.1 million for the
six months ended June 30, 1995. The increase was primarily due to an increase
in funding from the National Institute of Standards and Technology's Advanced
Technology Program grant.
Cost of product revenue was $606,000 and $707,000 for the three and six
months ended June 30, 1996, respectively, compared to no cost of product
revenue for the three and six months ended June 30, 1995. Negative margins
during the current quarter reflect scale-up costs of production and certain
reserves associated with the shipment of GeneChip systems.
Research and development expenses increased to $4.2 million and $8.3 million
for the three and six months ended June 30, 1996, respectively, compared to
$3.1 million and $5.4 million for the same periods ending June 30, 1995. The
increase in research and development expenses was attributable primarily to
the hiring of additional research and development personnel, cost of
instrumentation shipped to collaborative partners, and increased purchases of
research supplies. The Company expects research and development spending to
increase over the next several years as product development and core research
efforts expand.
General and administrative expenses increased to $1.9 million for the three
months ended June 30, 1996 compared to $979,000 for the three months ended
June 30, 1995. General and administrative expenses increased to $3.6 million
for the six months ended June 30, 1996 compared to $1.7 million for the six
months ended June 30, 1995. The increase in general and administrative
expenses was attributable primarily to the hiring of additional management
personnel and the incurring of legal and other professional fees in
connection with the overall scale-up of the Company's operations and business
development efforts. General and administrative expenses are expected to
continue to increase as the Company expands sales and marketing and adds
management and support staff.
Net interest income was $665,000 and $1.2 million for the three and six
months ended June 30, 1996, respectively. This compares to net interest
expense of $9,000 for the three months ended June 30, 1995 and net interest
income of $15,000 for the six months ended June 30, 1995. The increase in net
interest income was primarily attributable to increased investment balances
due to equity financings in August 1995 and June 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
the sale of equity securities, contributions from Affymax, government grants,
collaborative agreements, and
Page 10 of 59
<PAGE>
issuances of convertible debt. Through June 30, 1996, the Company has
received net cash of $155.6 million from financing activities since
inception, consisting principally of approximately $136.5 million from equity
financings, $10.6 million from contributions by Affymax, $7.2 million from
the issuance of convertible notes, and $1.3 million in lease financing.
As of June 30, 1996, the Company's cash, cash equivalents, and short-term
investments were $113.8 million compared to $38.9 million at December 31,
1995. The increase is primarily attributable to the receipt of approximately
$83.0 million in net proceeds from the Company's initial public offering in
June 1996, offset by net cash outlays of $8.7 million related to operating
and investing activities.
The Company expects its capital requirements to increase significantly over
the next several years as it expands its facilities and acquires scientific
equipment to support manufacturing and research and development efforts. The
Company's long-term capital expenditure requirements will depend on numerous
factors, including the progress of its research and development programs; the
development of commercial scale manufacturing capabilities; the ability of
Affymetrix to maintain existing collaborative arrangements and establish and
maintain new collaborative arrangements; the costs involved in preparing,
filing, prosecuting, defending and enforcing intellectual property rights;
the effectiveness of product commercialization activities and arrangements;
and other factors.
RISK FACTORS
The following factors, among others, could affect the Company's actual future
results, including its product sales, expenses and capital requirements, and
could cause them to differ from any forward looking statements made by or on
behalf of the Company.
EARLY STAGE OF DEVELOPMENT
The Company is at an early stage of development. The Company has not
commercialized significant quantities of products based on its technologies.
Substantially all of the Company's revenues have been derived from payments
from collaborative research and development agreements and government
research grants.
The Company's GeneChip system and other potential products will require
significant additional development and investment, including testing to
further validate performance and demonstrate cost effectiveness. While the
Company's initial product sales for research use have not required regulatory
approval, the Company expects that such approval will be required in the
future. The Company may need to undertake costly and time-consuming efforts
to obtain this approval. There can be no assurance that any products will be
successfully developed, be proven to be accurate and efficacious in any
markets, meet applicable regulatory standards in a timely manner or at all,
be protected from competition by others, avoid infringing the proprietary
rights of others, be manufactured in sufficient quantities or at reasonable
costs, or be marketed successfully.
The Company has experienced significant operating losses since inception and
expects these losses to continue for at least the next several years. Whether
the Company can successfully manage the
Page 11 of 59
<PAGE>
transition to a commercial-scale enterprise will depend upon a number of
factors including establishing its commercial manufacturing capability,
developing its marketing capabilities, establishing a direct sales force and
entering into collaborative arrangements to market its products. Failure to
make such a transition successfully would have a material adverse effect on
the Company's business, financial condition and results of operations.
UNCERTAINTIES RELATING TO TECHNOLOGICAL APPROACHES; NEED FOR ADDITIONAL
RESEARCH AND DEVELOPMENT
The Company intends to develop its GeneChip system for genomics and
diagnostics applications. The GeneChip system involves several new
technologies, including a complex chemical synthesis process necessary to
create DNA probe arrays. There can be no assurance that technicians will not
experience difficulties with the system that would prevent or limit its use.
The instrumentation and software that comprise the GeneChip system are new
and have not been previously used in commercial applications. As the system
is used, it is possible that previously unrecognized defects will emerge.
Further, in order for the Company to address new applications for the
GeneChip system, the Company may be required to reduce the size of its probe
arrays, increase the number of features on these arrays, develop instruments
capable of processing the information from such probe arrays, and design
software capable of managing such information. There can be no assurance that
the Company will be capable of validating or achieving the improvements in
the components of the GeneChip system necessary for its successful
commercialization. The Company's GeneChip technology will also need to
compete against well-established techniques and enhancements to such
techniques for analyzing genes and for diagnostics. There can be no assurance
that the GeneChip system will replace or compete successfully against
existing techniques and instruments. Furthermore, there can be no assurance
that the Company's GeneChip technology will be useful in providing
information on the function of genes or for the analysis of larger sequences
of genes.
The development of diagnostic and therapeutic products based on the Company's
technologies will be subject to the risks of failure inherent in the
development of products based on new technologies. These risks include
possibilities that any products based on these technologies will be found to
be ineffective, unreliable or unsafe, or otherwise fail to receive necessary
regulatory clearances; that products will be difficult to manufacture on a
large scale or will be uneconomical to market; that proprietary rights of
third parties will preclude the Company or its collaborative partners from
marketing products; or that third parties will market superior or equivalent
products.
UNCERTAINTY OF MARKET ACCEPTANCE
The commercial success of the Company's GeneChip system will depend upon
market acceptance by academic research centers, pharmaceutical and
biotechnology companies and reference laboratories. Market acceptance will
depend on many factors, including convincing researchers that the GeneChip
system is an attractive alternative to current technologies for the
acquisition, analysis and management of genetic information; the receipt of
regulatory clearances in the United States, Europe, Japan and elsewhere; the
need for laboratories to license other technologies, such as amplification
technologies that may be required to use the GeneChip system for certain
applications; and the availability of new proprietary markers that may be
important to the diagnosis,
Page 12 of 59
<PAGE>
monitoring and treatment of disease for incorporation on the Company's probe
arrays. Market acceptance may be adversely affected by ethical concerns that
may limit the use of the GeneChip system for certain diagnostic applications
or the analysis of genetic information.
Potential customers of the GeneChip system will need to acquire the Company's
fluidics station and probe array scanner in order to utilize the DNA probe
arrays. The cost of this instrumentation may deter certain potential
customers from purchasing probe arrays. The Company may be required to
discount the price of its GeneChip system in order to place the system with
customers. The failure of the Company to place sufficient quantities of the
instruments for the GeneChip system would have a material adverse effect on
its ability to sell the disposable probe arrays.
The Company expects that its customers will be concentrated in a small number
of academic research centers, pharmaceutical and biotechnology companies and
reference laboratories. As a result, the Company's financial performance may
depend on large orders from a limited number of customers. There are only
three major reference laboratories in the United States, two of which are
associated with large pharmaceutical companies. There can be no assurance
that the Company will be able to successfully market the GeneChip system to
reference laboratories or that the affiliation of these laboratories with
pharmaceutical companies will not adversely affect their decision to purchase
GeneChip systems. The Company's dependence on sales to a few large reference
laboratories may also strengthen the purchasing leverage of these potential
customers, which could reduce the sales price of the GeneChip system. Also,
the Company believes that the sales cycle for the GeneChip system will be
lengthy due to the need to educate potential customers about its
characteristics. The failure of the Company to gain additional customers, the
loss of any customer or a significant reduction in the level of sales to any
customer would have a material adverse effect on the Company's business,
financial condition and results of operations.
UNCERTAINTIES RELATED TO THE HIV PROBE ARRAY
The first commercial application of the Company's GeneChip system is an HIV
probe array designed to detect mutations in HIV, the virus that causes AIDS.
The HIV probe array provides sequence information from the reverse
transcriptase and protease genes of HIV and the system includes a fluidics
station, a scanner and related software. In April 1996, the Company
introduced the HIV probe array for research purposes only. The Company has
placed only a limited number of HIV probe arrays at customer sites to date,
all in the United States. These systems have been in operation for only a
limited period of time, and their accuracy and efficacy have not been fully
demonstrated. There are other uncertainties relating to the system, including
that the Company has no prior experience in introducing a commercial product,
that technicians may encounter difficulties with the system that would
prevent or limit its use, and that the Company will rely on third parties to
manufacture and service its instruments. Furthermore, there can be no
assurance that the accuracy of the HIV probe array in providing sequence
information from HIV will be better than current technologies, such as
gel-based sequencing techniques.
As new therapies and combinations of therapies for treating HIV are employed,
new mutations in the HIV genome may be discovered that would require the
Company to redesign its current probe array or develop new probe arrays or
such therapies may eliminate the need for the Company's HIV probe array
entirely. Advanced therapies could be discovered that target other components
of the
Page 13 of 59
<PAGE>
virus or which do not generate drug resistance. In addition, cost containment
pressures for treating HIV patients may limit the price the Company may be
able to charge potential customers for its HIV probe array. There can be no
assurance that the HIV probe array will provide useful diagnostic and
monitoring information, that it will operate without difficulties, that
technicians will have adequate training to use the system, or that the
Company will not experience manufacturing or marketing difficulties selling
the HIV probe array to academic research centers, pharmaceutical and
biotechnology companies and reference laboratories. Furthermore, there can be
no assurance that the HIV probe array will gain regulatory approval for
clinical use. The Company's product revenues in the near term are dependent
upon the commercialization of the HIV probe array. There can be no assurance
that these revenues will be realized in the near term, or at all. Failure of
the Company to successfully commercialize the HIV probe array could have a
material adverse effect on the Company's business, financial condition and
results of operations, and may adversely affect the Company's ability to
commercialize any future products it may develop.
HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES
The Company has incurred operating losses in each year since its inception,
including net losses of approximately $10.7 million during the year ended
December 31, 1995, and, at June 30, 1996, the Company had an accumulated
deficit of approximately $40.2 million. The Company's losses have resulted
principally from costs incurred in research and development and from general
and administrative costs associated with the Company's operations. These
costs have exceeded the Company's interest income and revenues. To date,
revenues have been generated principally from collaborative research and
development agreements and government research grants. The Company expects to
incur substantial additional operating losses over the next several years as
a result of increases in its expenses for research and product development,
manufacturing scale-up, expansion of sales and marketing and capital
expenditures.
PROFITABILITY UNCERTAIN
The Company has experienced substantial operating losses and has never been
profitable. The Company's future gross margins, if any, will be dependent on,
among other factors, the Company's ability to cost-effectively manufacture
the GeneChip system, product mix and the degree of price discounts required
to market its products to academic research centers, pharmaceutical and
biotechnology companies and reference laboratories. The amount of future
operating losses and time required by the Company to reach profitability, if
ever, are highly uncertain. The Company's ability to generate significant
revenues and become profitable is dependent in large part on the ability of
the Company to enter into additional collaborative arrangements and on the
ability of the Company and its collaborative partners to successfully
commercialize products developed under the collaborations. In addition,
delays in receipt of any necessary regulatory approvals by the Company or its
collaborators, or receipt of approvals by competitors, could adversely affect
the successful commercialization of the Company's technologies.
FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly operating results will depend upon the volume and
timing of orders for GeneChip systems and probe arrays received and delivered
during the quarter, variations in
Page 14 of 59
<PAGE>
payments under collaborative agreements, including milestones, royalties,
license fees, and other contract revenues, and the timing of new product
introductions by the Company. The Company's quarterly operating results may
also fluctuate significantly depending on other factors, including the
introduction of new products by the Company's competitors; regulatory
actions; market acceptance of the GeneChip system and other potential
products; investment in new technologies; changes in manufacturing capacity;
variations in gross margins of the Company's products; the cost, quality and
availability of reagents and components; the mix of products sold; changes in
government funding; and third-party reimbursement policies.
INTENSE COMPETITION; RAPID TECHNOLOGICAL CHANGE
Competition in genomics and diagnostics is intense and expected to increase.
Further, the technologies for discovering genes associated with significant
diseases and approaches for commercializing those discoveries are new and
rapidly evolving.
Currently, the Company's principal competition comes from existing
technologies that are used to perform many of the same functions for which
the Company plans to market its GeneChip systems. In the diagnostic field,
these technologies are provided by established diagnostic companies, such as
Abbott Laboratories, Boehringer Mannheim GmbH, Hoffmann-LaRoche, Inc.,
Johnson & Johnson and SmithKline Beecham plc. These technologies include a
variety of established assays, such as immunoassays, histochemistry, flow
cytometry and culture, and newer DNA probe diagnostics to analyze certain
amounts of genetic information. In the genomics field, competitive
technologies include gel-based sequencing using instruments provided by
companies such as the Applied Biosystems division of Perkin Elmer and
Pharmacia Biotech AB. In order to compete against existing technologies, the
Company will need to demonstrate to potential customers that the GeneChip
system provides improved performance and capabilities.
The market for diagnostic products derived from gene discovery is currently
limited and will be highly competitive. Many companies are developing and
marketing DNA probe tests for genetic and other diseases. Other companies are
conducting research on new technologies for diagnostic tests based on
advances in genetic information. Established diagnostic companies could
provide significant competition to the Company through the development of new
products. These companies have the strategic commitment to diagnostics, the
financial and other resources to invest in new technologies, substantial
intellectual property portfolios, substantial experience in new product
development, regulatory expertise, manufacturing capabilities and the
distribution channels to deliver products to customers. These companies also
have an installed base of instruments in several markets, including clinical
and reference laboratories, which are not compatible with the GeneChip
system. In addition, these companies have formed alliances with genomics
companies which provide them access to genetic information that may be
incorporated into their diagnostic tests.
In the genomics field, future competition will likely come from existing
competitors as well as other companies seeking to develop new technologies
for sequencing and analyzing genetic information. In addition, pharmaceutical
and biotechnology companies, such as Genome Therapeutics Corporation, Human
Genome Sciences, Inc., Incyte Pharmaceuticals, Inc., Millennium
Pharmaceuticals, Inc., Myriad Genetics, Inc. and Sequana Therapeutics, Inc.
have
Page 15 of 59
<PAGE>
significant needs for genomic information and may choose to develop or
acquire competing technologies to meet these needs.
Genomics and diagnostic technologies have undergone and are expected to
continue to undergo rapid and significant change. The Company's future
success will depend in large part on its ability to maintain a competitive
position with respect to these technologies. Rapid technological development
by the Company or others may result in products or technologies becoming
obsolete. In addition, products offered by the Company would be made obsolete
by less expensive or more effective tests based on other technologies or by
new therapeutic or prophylactic agents that obviate the need for diagnostic
and monitoring information. There is no assurance that the Company will be
able to make the enhancements to its technology necessary to compete
successfully with newly emerging technologies.
DEPENDENCE UPON COLLABORATIVE PARTNERS
An important element of the Company's business strategy involves
collaborations with pharmaceutical, diagnostic and biotechnology companies
that have discovered genes and may seek to use the Company's technologies to
discover genetic mutations or develop diagnostic and therapeutic products.
The Company has significant collaborations with Hewlett-Packard Company
("HP") and Genetics Institute, Inc. ("GI").
In November 1994, the Company entered into a collaborative agreement with HP
to develop an advanced scanner for use with the GeneChip probe arrays. The HP
scanner is currently under development and, in 1997 the Company expects that
HP will be the sole source of its scanners. Accordingly, if the HP scanner
does not become available on a timely basis or fails to meet its performance
and cost specifications, it would have a material adverse effect on the
Company's business.
The Company has two agreements with GI, dated November 1994 and December
1995, relating to use of GeneChip technology to measure gene expression in
order for GI to develop new therapeutic proteins. If GI is not successful in
using the GeneChip technology or if the Company fails to maintain a
satisfactory relationship with GI, the Company could lose significant
revenues and its ability to obtain additional collaborations with other
companies would be impaired.
The Company has received a substantial portion of its revenues since
inception from its collaborative partners and intends to enter into
collaborative arrangements with other companies to apply its technology, fund
development, commercialize potential future products, and assist in obtaining
regulatory approval. There can be no assurance that any of the Company's
present or future collaborative partners will perform their obligations as
expected or will devote sufficient resources to the development, clinical
testing or marketing of the Company's potential products developed under the
collaborations. Any parallel development by a partner of alternative
technologies or components of the GeneChip system, preclusion of the Company
from entering into competitive arrangements, failure to obtain timely
regulatory approvals, premature termination of an agreement, or failure by a
partner to devote sufficient resources to the development and
commercialization of the Company's products could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Page 16 of 59
<PAGE>
The Company's agreements with consultants and collaborators are complex.
There may be provisions within such agreements which give rise to disputes
regarding the rights and obligations of the parties. These and other possible
disagreements could lead to delays in collaborative research, development or
commercialization of certain products, or could require or result in
litigation or arbitration, which would be time-consuming and expensive, and
could have a material adverse effect on the Company's business, financial
condition and results of operations.
There can be no assurance that the Company will be able to negotiate future
collaborative arrangements on acceptable terms, if at all, or that such
collaborations will be successful.
NEED FOR ADDITIONAL FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL
The Company anticipates that its existing capital resources, together with
the net proceeds from the recently completed initial public offering and
interest earned thereon, will enable it to maintain currently planned
operations through at least 1998. However, this expectation is based on the
Company's current operating plan, which could change as a result of many
factors, and the Company could require additional funding sooner than
anticipated. In addition, the Company may choose to raise additional capital
due to market conditions or strategic considerations even if it has
sufficient funds for its operating plan. The Company's requirements for
additional capital will be substantial and will depend on many factors,
including payments received under existing and possible future collaborative
agreements; the availability of government research grant payments; the
progress of the Company's collaborative and independent research and
development projects; the costs of preclinical and clinical trials for the
Company's products; the prosecution, defense and enforcement of patent claims
and other intellectual property rights; and development of manufacturing,
marketing and sales capabilities. The Company has no credit facility or other
committed sources of capital. To the extent capital resources are
insufficient to meet future capital requirements, the Company will have to
raise additional funds to continue the development of its technologies. There
can be no assurance that such funds will be available on favorable terms, or
at all. To the extent that additional capital is raised through the sale of
equity or convertible debt securities, the issuance of such securities could
result in dilution to the Company's shareholders. If adequate funds are not
available, the Company may be required to curtail operations significantly or
to obtain funds through entering into collaboration agreements on
unattractive terms. The Company's inability to raise capital would have a
material effect on the Company's business, financial condition and results of
operations.
ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF GENETIC PREDISPOSITION TESTING
The Company's success will depend in part upon the Company's ability to
develop genetic tests for genes discovered by the Company and others. Genetic
tests, such as certain of the Company's GeneChip tests, may be difficult to
perform and interpret and may lead to misinformation or misdiagnosis.
Further, even when a genetic test identifies the existence of a mutation in
an individual, the interpretation of the result is often limited to the
identification of a statistical probability that the tested individual will
develop the disease or condition for which the test is performed. In
addition, once available, such tests may be subject to ethical concerns or
reluctance to administer or pay for tests for conditions that are not
treatable. Further, it is possible that
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<PAGE>
gene-based diagnostic tests marketed by other companies could encounter
specific difficulties, resulting in societal and governmental concerns
regarding genetic testing.
The prospect of broadly available genetic predisposition testing has raised
issues regarding the appropriate utilization and the confidentiality of
information provided by such testing. It is possible that discrimination by
insurance companies could occur through the raising of premiums by insurers
to prohibitive levels, outright cancellation of insurance or unwillingness to
provide coverage to patients shown to have a genetic predisposition to a
particular disease. In addition, employers could discriminate against
employees with a positive genetic predisposition due to the increased risk
for disease resulting in possible cost increases for health insurance and the
potential for lost employment time. Finally, governmental authorities could,
for social or other purposes, limit the use of genetic testing or prohibit
testing for genetic predisposition to certain conditions which could
adversely affect the use of the Company's products. There can be no assurance
that ethical concerns about genetic testing will not materially adversely
affect market acceptance of the Company's GeneChip system.
LIMITED MANUFACTURING CAPABILITY; SOLE SOURCE SUPPLIERS
The Company has limited experience manufacturing products for commercial
purposes. To date, the Company has a small scale facility providing limited
quantities of probe arrays for internal and collaborative purposes and
initial sales of the GeneChip system to the research market. To achieve the
production levels of probe arrays necessary for successful commercialization
of its products, the Company will need to scale-up its manufacturing
facilities and establish automated manufacturing capabilities. The Company
may also need to comply with the current good manufacturing practices ("GMP")
prescribed by the United States Food and Drug Administration ("FDA") for sale
of products in the United States, ISO standards for sale of products in
Europe, as well as other standards prescribed by various federal, state and
local regulatory agencies in the United States and other countries. Although
the Company does not currently need to comply with GMP to manufacture probe
arrays and related instrumentation for sale for research purposes, it may
need to be GMP compliant to sell these products to clinical reference
laboratories, and it will need to be compliant to sell these products for
clinical use. There can be no assurance that manufacturing and quality
control problems will not arise as the Company attempts to scale-up its
manufacturing facilities or that such scale-up can be achieved in a timely
manner or at commercially reasonable costs.
The Company's probe array manufacturing process is complex and involves a
number of technologies that have never before been combined in the
manufacture of a single product. The Company tests only selected probe arrays
from each wafer and only selected probes on each probe array. It is therefore
possible that defective probe arrays might not be identified before they are
shipped. The Company therefore relies on quality control procedures,
including controls on the manufacturing process and sample testing, to verify
the correct completion of the manufacturing process. In addition, there may
be certain aspects of the Company's manufacturing that are not fully
understood and cannot be readily replicated for commercial use. If the
Company is unable to manufacture probe arrays on a timely basis because of
these or other factors, its business, financial condition and results of
operations could be adversely affected.
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<PAGE>
As the Company's technologies evolve, new manufacturing techniques and
systems will be required. For example, it is anticipated that batch
processing systems will be needed to meet the Company's future probe array
manufacturing needs. Further, as products requiring increased density are
developed, miniaturization of the features on the arrays will be necessary,
requiring new or modified manufacturing equipment and processes. Further, the
Company's manufacturing equipment requires significant capital investment.
The Company will rely on a single manufacturing facility for its probe arrays
for the foreseeable future. This manufacturing facility is subject to natural
disasters such as earthquakes and floods. The former are of particular
significance since the manufacturing facility is located in an earthquake
prone area. In the event that its manufacturing facility were to be affected
by accidental or natural disasters, the Company would be unable to
manufacture products for sale until the facility was replaced or restored to
operation.
Certain key parts of the GeneChip system, such as the probe array scanner,
the fluidics station, and certain reagents, are currently available only from
a single source or a few sources. The Company currently obtains the scanner
for its GeneChip probe arrays from Molecular Dynamics, Inc. ("Molecular
Dynamics"). The Company is dependent on Molecular Dynamics for quality
testing and service of this instrument. The Company has entered into an
agreement with HP to supply a new scanner for the GeneChip system, which the
Company expects to be available for commercialization in 1997. The Company's
ability to commercialize a probe array with more features is dependent upon
successful development of the HP scanner. The Company has contracted with
RELA, Inc. ("RELA"), a private company, to supply the fluidics station that
is part of the GeneChip system. The fluidics stations for the initial
GeneChip systems were prototypes manufactured by the Company and not supplied
by RELA. No assurance can be given that probe array scanners, fluidics
stations or reagents will be available in commercial quantities at acceptable
costs. If the Company is required to seek alternative sources of supply, it
could be time consuming and expensive. In addition, the Company is dependent
on its vendors to provide components of appropriate quality and reliability
and to meet applicable regulatory requirements. Consequently, in the event
that supplies from these suppliers were delayed or interrupted for any
reason, the Company's ability to develop and supply its products could be
impaired, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The GeneChip system is a complex set of instruments and includes DNA probe
arrays, which are produced in an innovative and complicated manufacturing
process. During the beta testing phase of the GeneChip system's development,
the Company and its vendors have encountered and addressed a number of
technical problems, including software failures, improper alignment of probe
array wafers, valve and tube failures in the fluidics station, sensor wiring
issues and scanner control problems. Due to the complexity and lack of
operating history of these products, the Company anticipates that additional
technical problems may occur or be discovered as more systems are placed into
operation. If these problems cannot be readily addressed, they could cause
delays in shipments, warranty expenses and damages to customer relationships,
which would have a material adverse effect on the Company's business,
financial condition and results of operations.
LIMITED SALES AND MARKETING EXPERIENCE
The Company does not have a direct sales force and has only limited
experience in sales and marketing. As of June 30, 1996, the Company had
placed fourteen GeneChip systems, of which
Page 19 of 59
<PAGE>
only a portion had been sold. The Company has not placed any of its GeneChip
systems outside the United States. The Company intends to market its products
to academic research centers, pharmaceutical and biotechnology companies and
reference laboratories. The Company intends to market diagnostic tests
through a direct sales force to its potential customers for research use
only. The Company intends to market the GeneChip system for genomic
applications through collaborations with pharmaceutical and biotechnology
companies. The Company anticipates a long sales cycle to market the GeneChip
system to its potential customers. The Company will be required to enter into
collaboration or distribution arrangements to commercialize its products
outside the United States. There can be no assurance that the Company will be
able to establish a direct sales force or to establish collaborative or
distribution arrangements to market its products. Failure to do so would have
a material adverse effect on the Company's business, financial condition and
results of operations.
UNCERTAINTIES RELATED TO GOVERNMENT FUNDING
A significant portion of the Company's products for research use are likely
to be sold to universities, government research laboratories, private
foundations and other institutions where funding is dependent upon grants
from government agencies such as the National Institutes of Health ("NIH").
Research funding by the government, however, may be significantly reduced
under several budget proposals being discussed by the United States Congress.
Any such reduction may materially affect the ability of the Company's
prospective research customers to purchase the Company's products for
research use.
The Company has received and expects to continue to receive significant funds
under various United States Government research and technology programs.
While the programs are generally multi-year awards, they are subject to a
yearly appropriations process in the United States Congress. Proposed
legislation being debated in the United States Congress would eliminate or
reduce the program under which the Company's Advanced Technology Program
("ATP") grant is funded by the Department of Commerce. There can be no
assurance that the Company will receive the entire $20.8 million of funding
designated for it under the ATP grant, and termination of the ATP grant could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company's grants from the Departments of Commerce and Energy and the NIH
give the government certain rights to license for its own use inventions
resulting from funded work. There can be no assurance that the Company's
proprietary position will not be adversely affected should the government
exercise these rights.
UNCERTAINTIES RELATED TO THIRD-PARTY REIMBURSEMENT
The Company's ability to successfully commercialize its products may depend
on the Company's ability to obtain adequate levels of third-party
reimbursement for use of certain diagnostic tests in the United States,
Europe and other countries. Currently, availability of third-party
reimbursement is limited and uncertain for genetic tests.
Page 20 of 59
<PAGE>
In the United States, the cost of medical care is funded, in substantial
part, by government insurance programs, such as Medicare and Medicaid, and
private and corporate health insurance plans. Third-party payors may deny
reimbursement if they determine that a prescribed device or diagnostic test
has not received appropriate FDA or other governmental regulatory clearances,
is not used in accordance with cost-effective treatment methods as determined
by the payor, or is experimental, unnecessary or inappropriate. The Company's
ability to commercialize certain of its products successfully may depend on
the extent to which appropriate reimbursement levels for the costs of such
products and related treatment are obtained from government authorities,
private health insurers and other organizations, such as health maintenance
organizations ("HMOs"). Third-party payors are increasingly challenging the
prices charged for medical products and services. The trend towards managed
health care in the United States and the concurrent growth of organizations
such as HMOs, which could control or significantly influence the purchase of
health care services and products, as well as legislative proposals to reform
health care or reduce government insurance programs, may all result in lower
prices for certain of the Company's products. The cost containment measures
that health care providers are instituting and the results of any health care
reform could have an adverse effect on the Company's ability to sell certain
of its products and may have a material adverse effect on the Company's
business, financial condition and results of operations.
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL
The Company anticipates the manufacturing, labeling, distribution and
marketing of some or all of the Company's diagnostic products will be subject
to regulation in the United States and in certain other countries.
In the United States, the FDA regulates, as medical devices, most diagnostic
tests and IN VITRO reagents that are marketed as finished test kits or
equipment. Some clinical laboratories, however, purchase individual reagents
intended for specific analytes, and develop and prepare their own finished
diagnostic tests. Although the FDA has not generally exercised regulatory
authority over these individual reagents or the finished tests prepared from
them by the clinical laboratories. The FDA has recently proposed a rule that,
if adopted, would regulate the reagents sold to clinical laboratories as
medical devices. The proposed rule would also restrict sales of these
reagents to clinical laboratories certified under Clinical Laboratory
Improvement Amendments of 1988 as high complexity testing laboratories. The
Company intends to market some diagnostic products as finished test kits or
equipment and others as individual reagents; consequently, some or all of
these products will be regulated as medical devices.
Medical devices generally require FDA approval or clearance prior to
marketing in the United States. The process of obtaining FDA clearances or
approvals necessary to market medical devices can be time-consuming,
expensive and uncertain, and there can be no assurance that any clearance or
approval sought by the Company will be granted or that FDA review will not
involve delays, adversely affecting the marketing and sale of the Company's
products. Further, clearance or approval may place substantial restrictions
on the indications for which the product may be marketed or to whom it may be
marketed. Additionally, there can be no assurance that FDA will not request
additional data or request that the Company conduct further clinical studies.
Page 21 of 59
<PAGE>
If approval or clearance is obtained, the Company will be subject to
continuing FDA obligations. When manufacturing medical devices, the Company
will be required to adhere to regulations setting forth current GMP, which
require that the Company manufacture its products and maintain its records in
a prescribed manner with respect to manufacturing, testing and quality
control activities. In addition, among other requirements, the Company will
be required to comply with FDA requirements for labeling and promotion of its
medical devices. Further, if the Company wanted to make changes on a product
after FDA clearance or approval, including changes in indications or intended
use or other significant modifications to labeling, manufacturing or product
design, additional clearances or approvals would be required from the FDA.
Failure to obtain required regulatory approval or clearance or failure to
obtain timely approval or clearance, or the imposition of stringent labeling
or sales restrictions on the Company's products, could have a material
adverse effect on the Company. In addition, failure to comply with applicable
regulatory requirements could subject the Company to enforcement action,
including product seizures, recalls, withdrawal of clearances or approvals,
restrictions on or injunctions against marketing the Company's products, and
civil and criminal penalties, any one or more of which could have a material
adverse effect on the Company.
Medical device laws and regulations are also in effect in many countries
outside the United States. These range from comprehensive device approval
requirements for some or all of the Company's medical device products to
requests for product data or certifications. The number and scope of these
requirements are increasing. Failure to comply with applicable state and
foreign medical device laws and regulations may have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company is also subject to numerous environmental and safety laws and
regulations, including those governing the use and disposal of hazardous
materials. Any violation of, and the cost of compliance with, these
regulations could adversely affect the Company's operations.
DEPENDENCE ON PROPRIETARY TECHNOLOGY AND UNPREDICTABILITY OF PATENT
PROTECTION
Affymetrix depends upon patents to protect its proprietary technologies,
including those patents assigned to Affymetrix and those licensed to
Affymetrix. Many of these patents and applications have been filed and/or
issued in one or more foreign countries. Affymetrix also relies upon those
patents, copyright protection, trade secrets, know-how, continuing
technological innovation and licensing opportunities to develop and maintain
its competitive position. The Company's success will depend in part on its
ability to obtain patent protection for its products and processes, to
preserve its copyright and trade secrets and to operate without infringing
the proprietary rights of third parties.
The Company is party to various license option agreements (including
agreements with Affymax, Stanford University and the University of
California) which give it rights to use certain technologies. Failure of the
Company to maintain rights to such technology could have a material adverse
effect on the Company's business, financial condition and results of
operations. For example, inability of the Company to exercise the option for
the Stanford technology under
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commercially reasonable terms could have an adverse effect on the ability of
the Company to sell certain of its products.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including the Company, are generally uncertain and involve complex
legal and factual questions. There can be no assurance that any of the
Company's pending patent applications will result in issued patents, that the
Company will develop additional proprietary technologies that are patentable,
that any patents issued to the Company or its strategic partners will provide
a basis for commercially viable products or will provide the Company with any
competitive advantages or will not be challenged by third parties, or that
the patents of others will not have an adverse effect on the ability of the
Company to do business. In addition, patent law relating to the scope of
claims in the technology fields in which the Company operates is still
evolving. The degree of future protection for the Company's proprietary
rights, therefore, is uncertain. Furthermore, there can be no assurance that
others will not independently develop similar or alternative technologies,
duplicate any of the Company's technologies, or, if patents are issued to the
Company, design around the patented technologies developed by the Company. In
addition, the Company could incur substantial costs in litigation if it is
required to defend itself in patent suits brought by third parties or if it
initiates such suits.
Others may have filed and in the future are likely to file patent
applications that are similar or identical to those of the Company. To
determine the priority of inventions, the Company may have to participate in
interference proceedings declared by the United States Patent and Trademark
Office that could result in substantial cost to the Company. No assurance can
be given that any such patent application will not have priority over patent
applications filed by the Company.
The commercial success of the Company also depends in part on the Company
neither infringing patents or proprietary rights of third parties nor
breaching any licenses that may relate to the Company's technologies and
products. For example, the Company, its collaborators and customers may need
to acquire a license for an amplification technology to use the GeneChip
system, and there is no assurance such a license will be available on
commercially reasonable terms. The Company is aware of third-party patents
that may relate to the Company's technology, including reagents used in probe
array synthesis and in probe array assays, probe array scanners, synthesis
techniques, oligonucleotide amplification techniques, assays, and probe
arrays. There can be no assurance that the Company will not infringe these
patents, other patents or proprietary rights of third parties. In addition,
the Company has received and may in the future receive notices claiming
infringement from third parties as well as invitations to take licenses under
third party patents. Any legal action against the Company or its
collaborative partners claiming damages and seeking to enjoin commercial
activities relating to the affected products and processes could, in addition
to subjecting the Company to potential liability for damages, require the
Company or its collaborative partner to obtain a license in order to continue
to manufacture or market the affected products and processes. There can be no
assurance that the Company or its collaborative partners would prevail in any
such action or that any license (including licenses proposed by third
parties) required under any such patent would be made available on
commercially acceptable terms, if at all. There are a significant number of
United States and foreign patents and patent applications in the Company's
areas of interest, and the Company believes that there may be significant
litigation in the industry regarding patent and other intellectual property
rights. If the Company becomes involved in such litigation, it could consume
a substantial portion of the Company's managerial and financial
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resources, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The enactment of legislation implementing the General Agreement on Trade and
Tariffs has resulted in certain changes in United States patent laws that
became effective on June 8, 1995. Most notably, the term of patent protection
for patent applications filed on or after June 8, 1995 is no longer a period
of seventeen years from the date of grant. The new term of United States
patents will commence on the date of issuance and terminate twenty years
after the earliest effective filing date of the application. Because the time
from filing to issuance of biotechnology patent applications in the Company's
area of interest is often more than three years, a twenty-year term after the
effective date of filing may result in a substantially shortened term of the
Company's patent protection which may adversely affect the Company's patent
position.
Legislation is pending in Congress that may limit the ability of medical
device manufacturers in the future to obtain patents on medical procedures
that are not performed by, or as part of, devices or compositions which are
themselves patentable. Such legislation, if enacted, could have a material
adverse effect on the Company's ability to protect its proprietary methods
and procedures.
The Company also relies upon copyright and trade secret protection for its
confidential and proprietary information. There can be no assurance, however,
that such measures will provide adequate protection for the Company's trade
secrets or other proprietary information. In addition, there can be no
assurance that proprietary information will not be disclosed, that others
will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to the Company's
copyrights and trade secrets or disclose such technology, or that the Company
can meaningfully protect its trade secrets.
The Company's academic collaborators have certain rights to publish data and
information in which the Company has rights. There is considerable pressure
on academic institutions to publish discoveries in the genetics and genomics
fields. There can be no assurance that such publication would not adversely
affect the Company's ability to obtain patent protection for some genes in
which it may have a commercial interest.
ATTRACTION AND RETENTION OF KEY EMPLOYEES AND CONSULTANTS
The Company is highly dependent on the principal members of its management
and scientific staff. The loss of services of any of these persons could have
a material adverse effect on the Company's product development and
commercialization objectives. In addition, recruiting and retaining qualified
scientific personnel to perform future research and development work will be
critical to the Company's success. There can be no assurance that the Company
will be able to attract and retain such personnel.
Product development and commercialization will require additional personnel
in areas such as diagnostic testing, regulatory affairs, manufacturing and
marketing. The inability to acquire such services or to develop such
expertise could have a material adverse effect on the Company's business,
financial condition and results of operations.
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In addition, the Company relies on its scientific advisors to assist the
Company in formulating its research and development strategy. All of the
scientific advisors are employed by employers other than the Company and have
commitments to other entities that may limit their availability to the
Company. Some of the Company's scientific advisors also consult for companies
that may be competitors of the Company.
EXPOSURE TO PRODUCT LIABILITY CLAIMS
The Company's business exposes it to potential product liability claims that
are inherent in the testing, manufacturing, marketing and sale of human
diagnostic and therapeutic products. The Company intends to acquire clinical
liability insurance. There can be no assurance that it will be able to obtain
such insurance or general product liability insurance on acceptable terms or
at reasonable costs or that such insurance will be in sufficient amounts to
provide the Company with adequate coverage against potential liabilities. A
product liability claim or recall could have a material adverse effect on the
Company's business, financial condition and results of operations.
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<PAGE>
AFFYMETRIX, INC.
June 30, 1996
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) DATE OF MEETING.
The Annual Meeting of the Shareholders of Affymetrix, Inc. was held on April
15, 1996.
(b) ELECTION OF DIRECTORS.
Director
Continuously
Since
------------
John D. Diekman, Ph.D. 1992
Stephen P.A. Fodor, Ph.D. 1993
Paul Berg, Ph.D. 1993
Douglas M. Hurt 1995
Vernon R. Loucks, Jr. 1993
Barry C. Ross, Ph.D. 1995
David B. Singer 1993
John A. Young 1993
Alejandro C. Zaffaroni, Ph.D. 1992
15,923,262 shares were voted for each director nominee. There were no votes
against or withheld for any nominee.
(c) DESCRIPTION OF EACH MATTER VOTED ON AND NUMBER OF VOTES CAST.
For Against Withheld
---------- ------- --------
1. To approve an Amendment to the
Company's 1993 Stock Plan. 16,567,502 0 0
2. To approve the Company's 1996
Nonemployee Directors Stock Option
Plan. 16,567,502 0 0
3. To approve an amendment to the
Company's Articles of Incorporation
to effect a two-for-three reverse
stock split of outstanding Common
Stock. 16,560,302 7,200 0
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For Against Withheld
---------- ------- --------
4. To approve an amendment to the
Company's Articles of Incorporation
to eliminate cumulative voting. 16,567,502 0 0
5. To approve an amendment to the
Company's Articles of Incorporation
to prohibit shareholder action by
written consent. 15,750,302 817,200 0
6. To approve an amendment and
restatement of the Company's Articles
of Incorporation. 15,567,502 0 0
7. To approve an amendment of the
Company's By-laws to increase the size
of the Board of Directors to a range
of from six to eleven. 16,560,302 7,200 0
8. To approve appointment of the
Company's auditors for 1996. 16,567,502 0 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
Exhibit 10.23 Fourth Amendment to Lease between Sobrato Interests and
Affymetrix, Inc. dated May 31, 1996 (3380 Central
Expressway, Santa Clara, CA).
Exhibit 10.24 Lease between Sobrato Interests and Affymetrix, Inc. dated
May 31, 1996 (3450 Central Expressway, Santa Clara, CA).
Exhibit 11.1 Statement of computation of net loss per share.
Exhibit 27.0 Financial data schedule.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter ended June 30, 1996.
Page 27 of 59
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Affymetrix, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Santa Clara, State of California, on the dates indicated.
AFFYMETRIX, INC.
Signature Capacity Date
--------- -------- ----
/s/ John D. Diekman Chief Executive Officer and August 12, 1996
- ---------------------- Chairman of the Board
John D. Diekman, Ph.D.
/s/ Stephen P.A. Fodor President and Chief Operating August 12, 1996
- ------------------------- Officer
Stephen P.A. Fodor, Ph.D.
/s/ Kenneth J. Nussbacher Executive Vice President and August 12, 1996
- ------------------------- Chief Financial Officer
Kenneth J. Nussbacher
Page 28 of 59
<PAGE>
AFFYMETRIX, INC.
EXHIBIT INDEX
June 30, 1996
Page
----
Exhibit 10.23 Fourth Amendment to Lease between Sobrato Interests and
Affymetrix, Inc. dated May 31, 1996 (3380 Central
Expressway, Santa Clara, CA)............................... 30
Exhibit 10.24 Lease between Sobrato Interests and Affymetrix, Inc. dated
May 31, 1996 (3450 Central Expressway, Santa Clara, CA).... 32
Exhibit 11.1 Statement of computation of net loss per share............. 58
Exhibit 27.0 Financial data schedule.................................... 59
Page 29 of 59
<PAGE>
EXHIBIT 10.23
FOURTH AMENDMENT TO LEASE
This fourth amendment to lease ("Fourth Amendment") is made this 31st day of
May, 1996 by and between Sobrato Interests, a California limited partnership
("Landlord") and Affymetrix, a California Corporation ("Tenant"), as
successor lessee from Affymax Research Institute ("Affymax").
WITNESSETH
WHEREAS Landlord and Affymax entered into a lease dated March 5, 1992, a
First Amendment to Lease dated December 23, 1992, a Second Amendment to Lease
dated February 7, 1994 and a Third Amendment to Lease dated April 5, 1995
(collectively the "Lease") for the premises ("Premises") located at 3380
Central Expressway, Santa Clara, California; and
WHEREAS Tenant was a subtenant under Affymax as to the entire Premises under
the Lease and the sublease was terminated and Tenant has become the Tenant
under the Lease in place of Affymax, and;
WHEREAS effective the date of this Fourth Amendment, Landlord and Tenant wish
to modify the Lease to (i) reflect Tenant's exercise of its option to extend
the term as defined in paragraph 2 of the Third Amendment to Lease, (ii)
revise the Option Term as defined in Lease paragraph 36, and (iii) delete the
references to the 3410 Central lease;
NOW, THEREFORE, in order to effect the intent of the parties as set forth
above and for good and valuable consideration exchanged between the parties,
the Lease is amended as follows:
1. The term of the Lease is extended by 82 months so as to provide for an
Expiration Date of August 31, 2003.
2. Base Monthly Rent during the option period shall be according to the
following:
November 1, 1996 through August 31, 1998: $44,505.60 per month
September 1, 1998 through August 31, 2003: $52,001.28 per month
Page 30 of 59
<PAGE>
3. The Option Term as defined in Lease paragraph 36 is changed from twelve
(12) months to thirty-six (36) months.
4. Paragraph 3 of the First Amendment to Lease is hereby deleted in its
entirety which paragraph provided that if the Tenant exercises its option to
extend, the Lease shall be revised to conform to the provisions of the Lease
with the terms and conditions of the 3410 Central lease ("3410 Central
Lease"). In addition , the cross default provisions of the Lease are deleted
whereby a default on the 3410 Lease is a default upon the Lease and a default
on the Lease is a default on the 3410 Lease.
5. All defined terms shall have the same meanings as in the Lease, except as
otherwise stated in this Fourth Amendment.
6. Except as hereby amended, the Lease and all of the terms, covenants and
conditions thereof shall remain unmodified and in full force and effect. In
the event of any conflict or inconsistency between the terms and provisions
of this Fourth Amendment and the terms and provisions of the Lease, the terms
and provisions of this Fourth Amendment shall prevail.
IN WITNESS WHEREOF, the parties hereto have set their hands to this Fourth
Amendment as of the day and date first above written.
LANDLORD TENANT
Sobrato Interests, Affymetrix, Inc.,
a California limited partnership a California corporation
By: /s/ John Michael Sobrato By: /s/ Stephen P.A. Fodor
------------------------------ ------------------------------
Its: General Partner Its: President
------------------------------
Page 31 of 59
<PAGE>
EXHIBIT 10.24
LEASE BETWEEN
SOBRATO INTERESTS AND AFFYMETRIX
SECTION
- -------
Parties................................................................... 1
Premises.................................................................. 1
Use....................................................................... 1
Term and Rental........................................................... 1
Late Charges.............................................................. 2
Possession................................................................ 2
Acceptance of Possession and Covenants to Surrender....................... 3
Uses Prohibited........................................................... 4
Alterations and Additions................................................. 4
Maintenance of Premises................................................... 5
Landlord and Tenant's Obligations Regarding Common Area Costs......... 5
Common Area Costs..................................................... 5
Tenant's Allocable Share.............................................. 6
Waiver of Liability................................................... 6
Tenant's Obligations.................................................. 7
Hazard Insurance.......................................................... 8
Tenant's Use.......................................................... 8
Landlord's Insurance.................................................. 8
Tenant's Insurance.................................................... 8
Waiver................................................................ 9
Taxes..................................................................... 9
Utilities................................................................. 9
Abandonment............................................................... 9
Free From Liens........................................................... 10
Compliance With Governmental Regulations.................................. 10
Toxic Waste and Environmental Damage...................................... 11
Tenant's Responsibility............................................... 11
Tenant's Indemnity Regarding Hazardous Materials...................... 12
Page 32 of 59
<PAGE>
Landlord's Indemnity Regarding Hazardous Materials..................... 12
Indemnity.................................................................. 12
Advertisements and Signs................................................... 13
Attorney's Fees............................................................ 13
Tenant's Default........................................................... 13
Remedies............................................................... 14
Right to Re-enter...................................................... 14
Abandonment............................................................ 15
No Termination......................................................... 15
Surrender of Lease......................................................... 15
Habitual Default........................................................... 16
Landlord's Default......................................................... 16
Notices.................................................................... 16
Entry by Landlord.......................................................... 17
Destruction of Premises.................................................... 17
Destruction by an Insured Casualty..................................... 17
Destruction by an Uninsured Casualty................................... 18
Assignment or Sublease..................................................... 18
Consent by Landlord.................................................... 18
Assignment or Subletting Consideration................................. 19
No Release............................................................. 19
Effect of Default...................................................... 20
Condemnation............................................................... 20
Effects of Conveyance...................................................... 21
Subordination.............................................................. 21
Waiver..................................................................... 21
Holding Over............................................................... 22
Successors and Assigns..................................................... 22
Estoppel Certificates...................................................... 22
Option to Extend the Lease Term............................................ 23
Grant and Exercise of Option........................................... 23
Determination of Fair Market Rental.................................... 23
Resolution of a Disagreement over the Fair Market Rental................... 24
Page 33 of 59
<PAGE>
Options.................................................................... 25
Quiet Enjoyment............................................................ 25
Brokers.................................................................... 25
Authority of Parties....................................................... 25
Miscellaneous Provisions................................................... 26
Rent................................................................... 26
Management Fee......................................................... 26
Performance by Landlord................................................ 26
Interest............................................................... 26
Rights and Remedies.................................................... 26
Survival of Indemnities................................................ 26
Severability........................................................... 26
Choice of Law.......................................................... 27
Time................................................................... 27
Entire Agreement....................................................... 27
Representations........................................................ 27
Headings............................................................... 27
Exhibit "A"................................................................ 28
Page 34 of 59
<PAGE>
1. Parties: THIS LEASE, is entered into on this 31st day of May,
1996, between Sobrato Interests, a California limited partnership, and
Affymetrix, Inc., a California corporation, hereinafter called respectively
Landlord and Tenant.
2. Premises: Landlord hereby leases to Tenant, and Tenant hires from
Landlord those certain Premises with the appurtenances, situated in the City
of Santa Clara, County of Santa Clara, State of California, and more
particularly described as follows, to-wit:
That certain real property commonly known and designated as 3450 Central
Expressway consisting of approximately 45,360 square feet ("Building") and
159 parking stalls in a project consisting of a total of five (5) buildings,
including the Premises, totaling 412,171 square feet ("Project") as outlined
in red on Exhibit "A". The parking stalls shall be available for Tenant's
exclusive use but shall not be designated or segregated from the balance of
the parking area.
3. Use: Tenant shall use the Premises only for the following
purposes and shall not change the use of the Premises without the prior
written consent of Landlord: Office, research, development, testing, light
manufacturing, ancillary warehouse, and related legal uses. Landlord makes
no representation or warranty that any specific use of the Premises desired
by Tenant is permitted pursuant to any Laws.
4. Term and Rental: The term ("Lease Term") shall be for
seventy-eight (78) months, commencing on the 1st day of March, 1997
("Commencement Date"), and ending on the 31st day of August, 2003,
("Expiration Date"). In addition to all other sums payable by Tenant under
this Lease, Tenant shall pay base monthly rent ("Base Monthly Rent") for the
Premises according to the following schedule:
March 1, 1997 through August 31, 1998: $43,092.00 per month
September 1, 1998 through August 31, 2003: $50,349.60 per month
Base Monthly Rent shall be due on or before the first day of each calendar
month during Lease Term. All sums payable by Tenant under this Lease shall
be paid in lawful money of the United States of America, without offset or
deduction, and shall be paid to Landlord at such place or places as may be
designated from time to time by Landlord. Base Monthly Rent for any period
less than a calendar month shall be a pro rata portion of the monthly
installment.
Concurrently with Tenant's execution of this Lease, Tenant shall pay to
Landlord the sum of Forty Three Thousand Ninety Two and No/100 Dollars
($43,092.00) as prepaid rent for the period from March 1, 1997 to March 31,
1997.
5. Late Charges: Tenant hereby acknowledges that late payment by
Tenant to Landlord of Base Monthly Rent and other sums due hereunder will
cause Landlord to incur costs not contemplated by this Lease, the exact
amount of which will be extremely difficult to ascertain. Such costs
include, but are not limited to, administrative, processing, accounting
charges, and late charges, which may be imposed on Landlord by the terms of
any contract, revolving credit, mortgage or trust deed covering the Premises.
Accordingly, if any installment of Base Monthly Rent or any other sum due
from Tenant shall not be received by Landlord or
Page 35 of 59
<PAGE>
Landlord's designee within ten (10) days after written notice from Landlord
that such amount is due, Tenant shall pay to Landlord a late charge equal to
five (5%) percent of such overdue amount which shall be due and payable with
the payment then delinquent. Landlord agrees to waive said late charge in
the event the Base Monthly Rent or other sum due is received within five days
after receipt by Tenant of Landlord's notice to quit or pay rent. The
parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs Landlord will incur by reason of late payment by
Tenant. Acceptance of such late charge by Landlord shall in no event
constitute a waiver of Tenant's default with respect to such overdue amount,
nor prevent Landlord from exercising any of the other rights and remedies
granted hereunder. In the event that a late charge is payable hereunder,
whether or not collected, for three (3) consecutive installments of Base
Monthly Rent, then rent shall automatically become due and payable quarterly
in advance, rather than monthly, notwithstanding any provision of this Lease
to the contrary.
IT IS FURTHER MUTUALLY AGREED BETWEEN THE PARTIES AS FOLLOWS:
6. POSSESSION: If Landlord, for any reason whatsoever, cannot
deliver possession of the said Premises to Tenant at the Commencement Date,
as hereinbefore specified, this Lease shall not be void or voidable, nor
shall Landlord be liable to Tenant for any loss or damage resulting
therefrom; but in that event the commencement and termination dates of the
Lease and all other dates affected thereby shall be revised to conform to the
date of Landlord's delivery of possession. The above is however, subject to
the provision that the period of delay of delivery of the Premises shall not
exceed 90 days from the commencement date herein. If the period of delay of
delivery exceeds the foregoing, Tenant, at its option, may cancel this Lease
and declare it null and void. Notwithstanding the foregoing, Landlord agrees
avail itself of all legal remedies to evict the current occupant of the
Premises if it does not vacate by the expiration date of its lease.
7. Acceptance of Possession and Covenants to Surrender: On the
Commencement Date, Landlord shall deliver the keys to the Premises to Tenant
and Tenant shall accept possession from Landlord. Landlord shall reimburse
Tenant for the costs to put the HVAC system in good condition and repair, as
detailed in an inspection report to be issued by Therma Mechanical within 90
days prior to the Commencement Date. During the first 8 months of the Lease
Term, Tenant intends to make significant modifications ("Initial
Improvements") to the Premises. Tenant shall comply with the provisions of
Lease paragraph 9 in its construction of the Initial Improvements. The
Tenant agrees on the Expiration Date, or on the sooner termination of this
Lease, to surrender the Premises to Landlord in good condition and repair,
reasonable wear and tear excepted. "Good condition" shall mean that the
interior walls, floors, suspended ceilings, and carpeting within the Premises
will be cleaned to the same condition as existed at completion of the Initial
Improvements, normal wear and tear excepted. Tenant agrees, at its sole cost,
to remove all phone and data cabling installed by Tenant from the suspended
ceiling and repair or replace broken ceiling tiles, and relevel the ceiling
if required. Tenant shall ascertain from Landlord within thirty (30) days
before the Expiration Date whether Landlord desires to have the Premises or
any part or parts thereof restored to their condition as of the completion of
the Initial Improvements or to cause Tenant to surrender all Alterations in
place to Landlord. If Landlord shall so desire, then Tenant shall remove
such Alterations (except
Page 36 of 59
<PAGE>
Initial Improvements) as Landlord may require and shall repair and restore
said Premises or such part or parts thereof before the Expiration Date at
Tenant's sole cost and expense. Tenant on or before the Expiration Date or
sooner termination of this Lease, shall remove all its personal property and
trade fixtures from the Premises, and all property and fixtures not so
removed shall be deemed to be abandoned by Tenant. If the Premises are not
surrendered at the Expiration Date or sooner termination of this Lease in the
condition required by this paragraph, Tenant shall indemnify, defend, and
hold harmless Landlord against loss or liability resulting from delay by
Tenant in so surrendering the Premises including, without limitation, any
claims made by any succeeding tenant founded on such delay.
Notwithstanding the provisions of this paragraph 7, Landlord shall at its
sole expense repair all latent defects respecting the Premises. Landlord's
obligations with respect to the correction of such defects shall be limited
to the cost to correct the defective work and Landlord shall not be liable
for any consequential damages or other loss or damage incurred by Tenant. It
is further agreed by the parties that Landlord shall have no obligation to
repair HVAC or other Building systems serving the previous tenant's
manufacturing and process areas, including but not limited to wafer
fabrication areas.
8. Uses Prohibited: Tenant shall not commit, or suffer to be
committed, any waste upon the said Premises, or any nuisance, or other act or
thing which may disturb the quiet enjoyment of any other tenant in or around
the Building or allow any sale by auction upon the Premises, or allow the
Premises to be used for any unlawful or objectionable purpose, or place any
loads upon the floor, walls, or ceiling which endanger the structure, or use
any machinery or apparatus which will in any manner vibrate or shake the
Building, or place any harmful liquids, waste materials, or hazardous
materials in the drainage system of, or upon or in the soils surrounding the
Building. No materials, supplies, equipment, finished products or
semi-finished products, raw materials or articles of any nature or any waste
materials, refuse, scrap or debris shall be stored upon or permitted to
remain on any portion of the Premises outside of the Building proper without
Landlord's prior approval, which approval may be withheld in its sole
discretion.
9. Alterations and Additions: Tenant shall not make, or suffer to
be made, any alteration or addition to the said Premises ("Alterations"), or
any part thereof, without (i) the written consent of Landlord first had and
obtained, which consent shall not be unreasonably withheld or delayed, and
(ii) delivering to Landlord the proposed architectural and structural plans
for all such Alterations. Any Alterations, except movable furniture and
trade fixtures, shall become at once a part of the realty and belong to
Landlord. Alterations which are not to be deemed as trade fixtures shall
include heating, lighting, electrical systems, air conditioning,
partitioning, carpeting, or any other installation which has become an
integral part of the Premises. After having obtained Landlord's consent,
Tenant agrees that it will not proceed to make such Alterations until (i)
Tenant has obtained all required governmental approvals and permits, and (ii)
Tenant has provided Landlord reasonable security, in form reasonably approved
by Landlord, to protect Landlord against mechanics' lien claims. Tenant
further agrees to provide Landlord (i) written notice of the anticipated
start date and actual start date of the work, and (ii) a complete set of
half-size (15" X 21") vellum as-built drawings. All Alterations shall be
Page 37 of 59
<PAGE>
constructed in compliance with applicable buildings codes and laws, including
Title 24 and ADA, and shall be maintained, replaced or repaired at Tenant's
sole costs and expense. Notwithstanding the foregoing, Tenant shall be
entitled without obtaining Landlord's consent to make any alteration or
addition to the Premises which does not affect the structure of the Building,
provided that each such alteration costs no more than $15,000, and all such
alterations in any twelve (12) month period do not exceed an aggregate of
$50,000.
10. Maintenance of Premises:
A. Landlord and Tenant's Obligations Regarding Common Area Costs:
Landlord shall, at its sole cost and expense, maintain in good condition,
order, and repair, and replace as and when necessary, the foundation,
exterior load bearing walls and roof structure of the Building Shell.
Landlord agrees to perform the maintenance, repair and replacement of those
items defined in paragraph 10(B) below for which Common Area Costs are
incurred. Tenant agrees to reimburse Landlord for the expenses resulting
from Landlord's payment of Common Area Costs as defined in paragraph 10(B)
incurred by Landlord because the cost is not directly allocable to or payable
by a single tenant in the Building or the Project. Tenant agrees to pay
Tenant's Allocable Share as defined in paragraph 10(C) of the Common Area
Costs, as additional rental, within ten (10) days of written invoice from
Landlord.
B. Common Area Costs: For purposes of calculating Tenant's
Allocable Share of Building and of Project Costs, the term "Common Area
Costs" shall mean all costs and expenses of the nature hereinafter described
which are incurred in connection with ownership, maintenance and operation of
the Building or the Project in which the Premises are located, as the case
may be not directly allocable to or payable by a single tenant in the
Building or the Project, together with such additional facilities as may be
determined by Landlord to be reasonably desirable or necessary to the
ownership and operation of the Building and/or Project. All costs and
expenses shall be determined in accordance with generally accepted accounting
principles which shall be consistently applied (with accruals appropriate to
Landlord's business), including but not limited to, the following: (i)
common area utilities, including water and power and lighting to the extent
not separately metered; (ii) common area maintenance and service agreements
for the Building or the Project and the equipment therein including, without
limitation, common area janitorial services, alarm and security services,
exterior window cleaning, and maintenance of sidewalks, landscaping,
waterscape, parking areas, and driveways; (iii) insurance premiums and costs,
including without limitation, the premiums and cost of fire, casualty and
liability coverage and rental abatement and earthquake (if commercially
available) insurance applicable to the Building or Project; (iv) repairs,
replacements and general maintenance (excluding repairs and general
maintenance paid by proceeds of insurance or by Tenant or other third
parties, and repairs or alterations attributable solely to tenants of the
Building or Project other than Tenant); and (v) All real estate taxes,
special assessments, service payments in lieu of taxes, excises, transit
charges, housing fund assessment, levies, fees or charges and including any
substitutes or additions thereto which may occur during the Lease Term (and
Renewal Terms, if any) of this lease which are assessed, or imposed by any
public authority upon the Building or Project, the act of entering this
Lease, the occupancy by Tenant, the rent provided for in this Lease and
including real estate tax increases due to a sale or transfer of the Building
or the Project, in which the Premises are located, as such taxes are levied
or
Page 38 of 59
<PAGE>
appear on the City and County tax bills and assessment rolls. All special
assessments shall be paid over the longest period allowed by the taxing
authority. This shall be a Net Lease and the Base Monthly Rent shall be paid
to Landlord absolutely net of all costs and expenses. The provision for
payment of Common Area Costs by means of periodic payment of Tenant's
Allocable Share of Building and/or Project Costs are intended to pass on to
Tenant and reimburse Landlord for all costs of operating and managing the
Building and/or Project.
C. Tenant's Allocable Share: For purposes of prorating Common
Area Costs which Tenant shall pay, Tenant's Allocable Share of Building Costs
is computed by multiplying the total Common Area Costs for services shared by
the Building by a fraction, the numerator of which is the rentable square
footage of the Premises and the denominator of which is the total rentable
square footage of the Building (excluding common areas). Tenant's Allocable
Share of Project Costs shall be computed on a shared service by service
basis, by multiplying the total Common Area Costs for services shared by the
Building and one or more buildings in the Project by a fraction, the
numerator of which is the rentable square footage of the Premises and the
denominator of which is the total rentable square footage of the Buildings in
the Project which share the services. It is understood and agreed by
Landlord and Tenant that Tenant's Allocable Share of Building Costs is
100.00% and of Project Costs is 11.01 %. It is understood and agreed that
Tenant's obligation to share in Common Area Costs shall be adjusted to
reflect the commencement and termination dates of the Lease Term and are
subject to recalculation in the event of expansion of the Building or Project.
D. Waiver of Liability: Failure by Landlord to perform any
defined services, or any cessation thereof, when such failure is caused by
accident, breakage, repairs, strikes, lockout or other labor disturbances or
labor disputes of any character, or by any other cause, similar or
dissimilar, beyond the reasonable control of Landlord, shall not render
Landlord liable in any respect for damages to either person or property, nor
be construed as an eviction of Tenant, nor cause an abatement of rent nor
relieve Tenant from fulfillment of any covenant or agreement hereof. Should
any of the equipment or machinery utilized in supplying the services listed
herein break down, or for any cause cease to function properly, upon receipt
of written notice from Tenant of any deficiency or failure of any defined
Services, Landlord shall use reasonable diligence to repair the same
promptly, but Tenant shall have no right to terminate this Lease, and shall
have no claim for rebate of rent or damages, on account of any interruptions
in service occasioned thereby or resulting therefrom. Tenant waives the
provisions of California Civil Code Sections 1941 and 1942 concerning the
Landlord's obligation of tenantability and Tenant's right to make repairs and
deduct the cost of such repairs from the rent. Landlord shall not be liable
for a loss of or injury to property, however occurring, through or in
connection with or incidental to furnishing or its failure to furnish any of
the foregoing, unless such loss or injury is due to the negligence or willful
misconduct of Landlord.
E. Tenant's Obligations: Except as provided in 10(A) above,
Tenant shall, at its sole cost, keep and maintain, repair and replace, said
Premises and appurtenances and every part hereof, including but not limited
to, exterior walls, roof membrane, glazing, plumbing, electrical and HVAC
systems, and all the Tenant Interior Improvements in good and sanitary order,
condition, and repair; normal wear and tear and damage by casualty excepted.
Tenant shall provide Landlord with a copy of a service contract between
Tenant and a licensed air-
Page 39 of 59
<PAGE>
conditioning and heating contractor which contract shall provide for
bi-monthly maintenance of all air conditioning and heating equipment at the
Premises. Tenant shall pay the cost of all air-conditioning and heating
equipment repairs or replacements which are either excluded from such service
contract or any existing equipment warranties. All wall surfaces and floor
tile are to be maintained in an as good a condition as when Tenant took
possession free of holes, gouges, or defacements. Tenant agrees to limit
attachments to vinyl demountable wall surfaces exclusively to V-joints.
Tenant shall also be responsible for the preventive maintenance of the
membrane of the roof, which responsibility shall be deemed properly
discharged if (i) Tenant contracts with a licensed roof contractor who is
reasonably satisfactory to both Tenant and Landlord, at Tenant's sole cost,
to inspect the roof membrane at least every six (6) months, with the first
inspection due the sixth (6th) month after the Commencement Date, and (ii)
Tenant performs, at Tenant's sole cost, all preventive maintenance
recommendations made by such contractor within a reasonable time after such
recommendations are made. Such preventive maintenance might include acts
such as clearing storm gutters and drains, removing debris from the roof
membrane, trimming trees overhanging the roof membrane, applying coating
materials to seal roof penetrations, repairing blisters, and other routine
measures. Tenant shall provide to Landlord a copy of such preventive
maintenance contract and paid invoices for the recommended work.
11. Hazard Insurance:
A. Tenant's Use: Tenant shall not use, or permit said Premises,
or any part thereof, to be used, for any purpose other than that for which
the said Premises are hereby leased; and no use shall be made or permitted
to be made of the said Premises, nor acts done, which will cause an increase
in premiums or a cancellation of any insurance policy covering said Building,
or any part thereof, nor shall Tenant sell or permit to be kept, used or
sold, in or about said Premises, any article which may be prohibited by the
standard form of fire insurance policies. Tenant shall, at its sole cost and
expense, comply with any and all requirements, pertaining to said Premises,
of any insurance organization or company, necessary for the maintenance of
reasonable fire and public liability insurance, covering said Building and
appurtenances.
B. Landlord's Insurance: Landlord agrees to purchase and keep
in force fire and extended coverage, earthquake (at Landlord's election and
at a commercially reasonable rate), and 12 month rental loss insurance
covering the Premises in amounts not to exceed the actual insurable value of
the Building as determined by Landlord's insurance company's appraisers. The
Tenant agrees to pay to the Landlord as additional rent, on demand, the full
cost of said insurance as evidenced by insurance billings to the Landlord,
and in the event of damage covered by said insurance, the amount of any
deductible under such policy. Payment shall be due to Landlord within ten
(10) days after written invoice to Tenant. Tenant consents to Landlord's
current insurance deductible of $5,000.00 and shall have the right to approve
any future change in the deductible amount. It is understood and agreed that
Tenant's obligation under this paragraph will be prorated to reflect the
commencement and termination dates of this Lease.
Page 40 of 59
<PAGE>
C. Tenant's Insurance: Tenant, at its sole cost, agrees to
insure its personal property and Alterations for amounts not to exceed their
actual insurable value and to obtain worker's compensation and public
liability and property damage insurance for occurrences within the Premises
with a $5,000,000.00 combined single limit for bodily injury and property
damage. Tenant shall name Landlord and Landlord's lender as an additional
insured, shall deliver a copy of the policies and renewal certificates to
Landlord. All such policies shall provide for thirty (30) days' prior
written notice to Landlord of any cancellation, termination, or reduction in
coverage. Notwithstanding the above, Landlord retains the right to have
Tenant provide other forms of insurance which may be reasonably required to
cover future risks.
D. Waiver: Landlord and Tenant hereby waive any and all rights
each may have against the other on account of any loss or damage occasioned
to the Landlord or the Tenant as the case may be, or to the Premises or its
contents, and which may arise from any risk covered by their respective
insurance policies, as set forth above. The parties shall use their
reasonable efforts to obtain from their respective insurance companies a
waiver of any right of subrogation which said insurance company may have
against the Landlord or the Tenant, as the case may be.
12. Taxes: Tenant shall be liable and shall pay prior to delinquency,
for all taxes and assessments levied against personal property and trade or
business fixtures, and agrees to pay, as additional rental, all real estate
taxes and assessment installments (special or general) or other impositions
or charges which may be levied on the Premises, upon the occupancy of the
Premises and including any substitute or additional charges which may be
imposed during, or applicable to the Lease Term including real estate tax
increases due to a sale or other transfer of the Premises, as they appear on
the City and County tax bills during the Lease Term, and as they become due.
It is understood and agreed that Tenant's obligation under this paragraph
will be prorated to reflect the commencement and termination dates of this
Lease. In any time during the Lease Term a tax, excise on rents, business
license tax, or any other tax, however described, is levied or assessed
against Landlord, as a substitute in whole or in part for taxes assessed or
imposed on land or Buildings, Tenant shall pay and discharge his pro rata
share of such tax or excise on rents or other tax before it becomes
delinquent, except that this provision is not intended to cover net income
taxes, inheritance, gift or estate tax imposed upon the Landlord. In the
event that a tax is placed, levied, or assessed against Landlord and the
taxing authority takes the position that the Tenant cannot pay and discharge
his pro rata share of such tax on behalf of the Landlord, then at the sole
election of the Landlord, the Landlord may increase the rental charged
hereunder by the exact amount of such tax and Tenant shall pay such increase
as additional rent hereunder.
13. Utilities: Tenant shall pay directly to the providing utility all
water, gas, heat, light, power, telephone and other utilities supplied to the
Premises. Landlord shall not be liable for a loss of or injury to property,
however occurring, through or in connection with or incidental to furnishing
or failure to furnish any of utilities to the Premises and Tenant shall not
be entitled to abatement or reduction of any portion of the Base Monthly Rent
so long as any failure to provide and furnish the utilities to the Premises
due to any cause beyond the Landlord's reasonable control.
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14. Abandonment: Tenant shall not abandon the Premises at any time
during the Lease Term; and if Tenant shall abandon or surrender said
Premises, or be dispossessed by process of law, or otherwise, any personal
property belonging to Tenant and left on the Premises shall be deemed to be
abandoned, at the option of Landlord, except such property as may be
mortgaged to Landlord. Notwithstanding the foregoing, Tenant shall be
entitled to suspend its operations on the Premises and vacate the Premises
provided that Tenant continues to timely pay rent and perform all other
obligations of Tenant under this Lease, and further provided that Tenant
provides a security guard or other reasonable security protection for the
Premises.
15. Free From Liens: Tenant shall keep the Premises and the Building
free from any liens arising out of any work performed, materials furnished,
or obligations incurred by Tenant or claimed to have been performed for
Tenant. In the event Tenant fails to discharge any such lien within ten (10)
days after receiving notice of the filing, Landlord shall be entitled to
discharge such lien at Tenant's expense and all resulting costs incurred by
Landlord, including attorney's fees shall be due from Tenant as additional
rent.
Notwithstanding the provisions of this paragraph 15, Tenant shall have the
right to contest such liens if Tenant obtains a bond equal to 150% of the
amount of such lien to prevent enforcement of the lien during such contest or
otherwise makes adequate provision to prevent enforcement of the lien during
such contest.
16. Compliance With Governmental Regulations: Tenant shall, at its
sole cost and expense, comply with all of the requirements of all Municipal,
State and Federal authorities now in force, or which may hereafter be in
force, pertaining to the said Premises, and shall faithfully observe in the
use of the Premises all Municipal ordinances and State and Federal statutes
now in force or which may hereafter be in force. The judgment of any court
of competent jurisdiction, or the admission of Tenant in any action or
proceeding against Tenant, whether Landlord be a party thereto or not, that
Tenant has violated any such ordinance or statute in the use of the Premises,
shall be conclusive of that fact as between Landlord and Tenant.
Notwithstanding the provisions of this paragraph 16 and excepting Title 24
and ADA work for which Tenant is responsible, if any improvement or
alteration to the Premises is required as a result of any future laws or
regulations affecting the Premises not related to Tenant's specific use of
the Premises, and provided further said improvement or alteration is not
required because of alterations to the Premises made by Tenant, the cost of
such improvements shall be allocated between Landlord and Tenant such that
Tenant shall pay to Landlord upon completion of such improvement, the portion
of the cost thereof equal to the remaining number of years in the lease term
divided by the anticipated useful life of such improvement. Landlord
represents and warrants, to the best of its knowledge, that the Building
shell applies with all building codes that were applicable as of the date of
its construction.
17. Toxic Waste and Environmental Damage:
A. Tenant's Responsibility: Without the prior written consent
of Landlord, Tenant shall not bring, use, or permit upon the Premises, or
generate, emit, or dispose from the Premises any chemicals, toxic or
hazardous gaseous, liquid or solid materials or waste, including
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without limitation, material or substance having characteristics of
ignitability, corrosivity, reactivity, or toxicity or substances or materials
which are listed on any of the Environmental Protection Agency's lists of
hazardous wastes or which are identified in Sections 66680 through 66685 of
Title 22 of the California Administrative Code as the same may be amended
from time to time ("Hazardous Materials"). In order to obtain consent,
Tenant shall deliver to Landlord its written proposal describing the toxic
material to be brought onto the Premises, measures to be taken for storage
and disposal thereof, safety measures to be employed to prevent pollution of
the air, ground, surface and ground water. Landlord consents to Tenant's use
of Hazardous Materials on the Premises on the condition that Tenant
represents and warrants that Tenant will (i) adhere to all reporting and
inspection requirements imposed by Federal, State, County or Municipal laws,
ordinances or regulations and will provide Landlord a copy of any such
reports or agency inspections, (ii) obtain and provide Landlord copies of all
necessary permits required for the use and handling Hazardous Materials on
the Premises, (iii) enforce Hazardous Materials handling and disposal
practices consistent with industry standards, and (iv) properly close the
facility with regard to Hazardous Materials including the removal or
decontamination of any process piping, mechanical ducting, storage tanks,
containers, or trenches which have come into contact with Hazardous Materials
and obtain a closure certificate from the local administering agency prior to
the Expiration Date. Landlord may employ an independent engineer or
consultant to periodically inspect Tenant's operations to verify that Tenant
is complying with its obligations under this paragraph. In the event it is
determined by Landlord's consultant that Tenant is in material violation with
respect to its obligations under this paragraph and such violation has not
previously been reported by Tenant or has not been cured, then Tenant shall
pay the reasonable future expense of employing Landlord's independent
engineer or consultant to periodically inspect Tenant's operations. The
forgoing right of inspection shall be exercised by Landlord only if Landlord
believes it may be subject to liability because of Tenant's handling of
hazardous materials.
B. Tenants Indemnity Regarding Hazardous Materials: Tenant
shall comply, at its sole cost, with all laws pertaining to, and shall
indemnify and hold Landlord harmless from any claims, liabilities, costs or
expenses incurred or suffered by Landlord, except through Landlord's
negligence or willful misconduct, arising from such bringing, using,
permitting, generating, emitting or disposing of Hazardous Materials.
Tenant's indemnification and hold harmless obligations include, without
limitation, (i) claims, liability, costs or expenses resulting from or based
upon administrative, judicial (civil or criminal) or other action, legal or
equitable, brought by any private or public person under common law or under
the Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA"), the Resource Conservation and Recovery Act of 1980 ("RCRA")
or any other Federal, State, County or Municipal law, ordinance or
regulation, (ii) claims, liabilities, costs or expenses pertaining to the
identification, monitoring, cleanup, containment, or removal of Hazardous
Materials from soils, riverbeds or aquifers including the provision of an
alternative public drinking water source, and (iii) all costs of defending
such claims.
C. Landlords Indemnity Regarding Hazardous Materials: Landlord
shall indemnify and hold Tenant harmless from any claims, liabilities, costs
or expenses incurred or suffered by Tenant related to the removal,
investigation, monitoring or remediation of Hazardous Materials which are
present or which come to be present on the Premises through no fault of
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Tenant. Landlord's indemnification and hold harmless obligations include,
without limitation, (i) claims, liability, costs or expenses resulting from
or based upon administrative, judicial (civil or criminal) or other action,
legal or equitable, brought by any private or public person under common law
or under the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA"), the Resource Conservation and Recovery Act of 1980
("RCRA") or any other Federal, State, County or Municipal law, ordinance or
regulation, (ii) claims, liabilities, costs or expenses pertaining to the
identification, monitoring, cleanup, containment, or removal of Hazardous
Materials from soils, riverbeds or aquifers including the provision of an
alternative public drinking water source, and (iii) all costs of defending
such claims. In no event shall Landlord be liable for any consequential
damages suffered or incurred by Tenant as a result of any such contamination.
18. Indemnity: As a material part of the consideration to be rendered
to Landlord, Tenant hereby waives all claims against Landlord for damages to
goods, wares and merchandise, and all other personal property in, upon or
about said Building, for injuries to persons in or about said Building, or
for injuries or claims by Tenant's agents or invitees in or about the
Project, from any cause arising at any time except due to the negligence or
willful misconduct of Landlord, and Tenant will hold Landlord exempt and
harmless from any damage or injury to any person, or to the goods, wares and
merchandise and all other personal property of any person, arising from the
use of the Premises by Tenant, or from the failure of Tenant to keep the
Building in good condition and repair, as herein provided. Further, in the
event Landlord is made party to any litigation due to the acts or omission of
Tenant, Tenant will indemnify and hold Landlord harmless from any such claim
or liability including Landlord's costs and expenses and reasonable
attorney's fees incurred in defending such claims.
19. Advertisements and Signs: Tenant will not place or permit to be
placed, in, upon or about the said Premises any unusual or extraordinary
signs, or any signs not approved by the city or other governing authority.
The Tenant will not place, or permit to be placed, upon the Premises, any
signs, advertisements or notices without the written consent of the Landlord
as to type, size, design, lettering, coloring and location, and such consent
will not be unreasonably withheld. Any sign so placed on the Premises shall
be removed by Tenant, at its expense, prior to the Expiration Date or
promptly following the earlier termination of the lease and Tenant shall
repair any damage or injury to the Premises caused thereby, and if not so
removed by Tenant then Landlord may have same so removed at Tenant's expense.
20. Attorneys Fees: In case suit should be brought for the possession
of the Premises, for the recovery of any sum due hereunder, or because of the
breach of any other covenant herein, the losing party shall pay to the
prevailing party a reasonable attorney's fee as part of its costs which shall
be deemed to have accrued on the commencement of such action.
21. Tenants Default: The occurrence of any of the following shall
constitute a material default and breach of this Lease by Tenant: a) Any
failure by Tenant to pay the rental or to make any other payment required to
be made by Tenant hereunder provided however, that Tenant may cure such
default by payment to Landlord of the Base Monthly Rent or other sum due
within ten (10) days after receipt by Tenant of written notice specifying
Landlord has failed to receive the amount in question; b) The abandonment of
the Premises by Tenant; c) A failure
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by Tenant to observe and perform any other provision of this Lease to be
observed or performed by Tenant, where such failure continues for thirty (30)
days after written notice thereof by Landlord to Tenant; provided, however,
that if the nature of such default is such that the same cannot reasonably be
cured within such thirty (30) day period Tenant shall not be deemed to be in
default if Tenant shall within such period commence such cure and thereafter
diligently prosecute the same to completion; d) The making by Tenant of any
general assignment for the benefit of creditors; the filing by or against
Tenant of a petition to have Tenant adjudged a bankrupt or of a petition for
reorganization or arrangement under any law relating to bankruptcy (unless,
in the case of a petition filed against Tenant, the same is dismissed after
the filing); the appointment of a trustee or receiver to take possession of
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where possession is not restored to Tenant within
thirty (30) days; or the attachment, execution or other judicial seizure of
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where such seizure is not discharged within thirty
(30) days. The notice requirements set forth herein are in lieu of and not
in addition to the notices required by California Code of Civil Procedure
Section 1161.
A. Remedies: In the event of any such default by Tenant, then
in addition to any other remedies available to Landlord at law or in equity,
Landlord shall have the immediate option to terminate this Lease and all
rights of Tenant hereunder by giving written notice of such intention to
terminate. In the event that Landlord shall elect to so terminate this Lease
then Landlord may recover from Tenant: a) the worth at the time of award of
any unpaid rent which had been earned at the time of such termination; plus
b) the worth at the time of award of the amount by which the unpaid rent
would have been earned after termination until the time of award exceeds the
amount of such rental loss Tenant proves could have been reasonably avoided;
plus c) the worth at the time of award of the amount by which the unpaid rent
for the balance of the Lease Term after the time of award exceeds the amount
of such rental loss that Tenant proves could be reasonably avoided; plus d)
any other amount necessary to compensate Landlord for all the detriment
directly and foreseeably caused by Tenant's failure to perform his
obligations under this Lease or which in the ordinary course of things would
be likely to result therefrom, and e) at Landlord's election, such other
amounts in addition to or in lieu of the foregoing as may be permitted from
time to time by applicable California law. The term "rent", as used herein,
shall be deemed to be and to mean the minimum monthly installments of Base
Monthly Rent and all other sums required to be paid by Tenant pursuant to the
terms of this Lease, all other such sums being deemed to be additional rent
due hereunder. As used in (a) and (b) above, the "worth at the time of
award" to be computed by allowing interest at the rate of the discount rate
of the Federal Reserve Bank of San Francisco plus five (5%) percent per
annum. As used in (c) above, the "worth at the time of award" to be computed
by discounting such amount at the discount rate of the Federal Reserve Bank
of San Francisco at the time of award plus one (1%) percent.
B. Right to Re-enter: In the event of any such default by
Tenant, Landlord shall also have the right, with or without terminating this
Lease, to re-enter the Premises and remove all persons and property from the
Premises; such property may be removed and stored in a public warehouse or
elsewhere at the cost of and for the account of Tenant and disposed of by
Landlord in any manner permitted by law.
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C. Abandonment: In the event of the abandonment of the
Premises by Tenant or in the event that Landlord shall elect to re-enter as
provided in paragraph 21(B) above or shall take possession of the Premises
pursuant to legal proceeding or pursuant to any notice provided by law, then
if Landlord does not elect to terminate this Lease as provided in paragraph
21(A) above, then the provisions of California Civil Code Section 1951.4, as
amended from time to time, shall apply and Landlord may from time to time,
without terminating this Lease, either recover all rental as it becomes due
or relet the Premises or any part thereof for such term or terms and at such
rental or rentals and upon such other terms and conditions as Landlord in its
sole discretion may deem advisable with the right to make alterations and
repairs to the Premises. In the event that Landlord shall elect to so relet,
then rentals received by Landlord from such reletting shall be applied:
first, to the payment of any indebtedness other than Base Monthly Rent due
hereunder from Tenant to Landlord; second, to the payment of any cost of
such reletting; third, to the payment of the cost of any reasonable
alterations and repairs to the Premises; fourth, to the payment of Base
Monthly Rent due and unpaid hereunder; and the residue, if any, shall be
held by Landlord and applied in payment of future Base Monthly Rent as the
same may become due and payable hereunder. Should that portion of such
rentals received from such reletting during any month, which is applied by
the payment of rent hereunder, be less than the rent payable during that
month by Tenant hereunder, then Tenant shall pay such deficiency to Landlord
immediately upon demand therefor by Landlord. Such deficiency shall be
calculated and paid monthly. Tenant shall also pay to Landlord, as soon as
ascertained, any costs and expenses incurred by Landlord in such reletting or
in making such alterations and repairs not covered by the rentals received
from such reletting.
D. No Termination: No re-entry or taking possession of the
Premises by Landlord pursuant to 21(B) or 21(C) of this Article 22 shall be
construed as an election to terminate this Lease unless a written notice of
such intention be given to Tenant or unless the termination thereof be
decreed by a court of competent jurisdiction. Notwithstanding any reletting
without termination by Landlord because of any default by Tenant, Landlord
may at any time after such reletting elect to terminate this Lease for any
such default.
22. Surrender of Lease: The voluntary or other surrender of this
Lease by Tenant, or a mutual cancellation thereof, shall not automatically
effect a merger of the Lease with Landlord's ownership of the Building or
Premises. Instead, at the option of Landlord, Tenant's surrender may
terminate all or any existing sublease or subtenancies, or may operate as an
assignment to Landlord of any or all such subleases or subtenancies, thereby
creating a direct Landlord-Tenant relationship between Landlord and any
subtenants.
23. Habitual Default: Notwithstanding anything to the contrary
contained in paragraph 21, 21 (A) (B) (C) and (D), the parties hereto agree
that if the Tenant shall have defaulted in the performance of any (but not
necessarily the same) term or condition of this Lease for three or more times
during any twelve month period during the Lease Term hereof, then such
conduct shall, at the election of the Landlord, represent a separate event of
default which cannot be cured by the Tenant. Tenant acknowledges that the
purpose of this provision is to prevent repetitive defaults by the Tenant
under the Lease, which work a hardship upon the Landlord, and deprive the
Landlord of the timely performance by the Tenant hereunder.
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24. Landlords Default: In the event of Landlord's failure to perform
any of its covenants or agreements under this Lease, Tenant shall give
Landlord written notice of such failure and shall give Landlord thirty (30)
days or such other reasonable opportunity to cure or to commence to cure such
failure prior to any claim for breach or for damages resulting from such
failure. In addition, upon any such failure by Landlord, Tenant shall give
notice by registered or certified main to any person or entity with a
security interest in the Premises ("Mortgagee") that has provided Tenant with
notice of its interest in the Premises, and shall provide such Mortgagee a
reasonable opportunity to cure such failure, including such time to obtain
possession of the Premises by power of sale or judicial foreclosure, if such
should prove necessary to effectuate a cure. Tenant agrees that each of the
Mortgagees to whom this Lease has been assigned is an expressed third party
beneficiary hereof. Tenant shall not make any prepayment of rent more than
one (1) month in advance without the prior written consent of such Mortgagee.
Tenant waives any right under California Civil Code Section 1950.7 or any
other present or future law to the collection of any payment or deposit from
such Mortgagee or any purchaser at a foreclosure sale of such Mortgagee's
interest unless such Mortgagee or such purchaser shall have actually received
and not refunded the applicable payment or deposit.
25. Notices: All notices, demands, requests, or consents required to
be given under this Lease shall be sent in writing by U.S. certified mail,
return receipt requested, or by personal delivery addressed to the party to
be notified at the address for such party specified in paragraph 1 of this
Lease, or to such other place as the party to be notified may from time to
time designate by at least fifteen (15) days prior notice to the notifying
party.
26. Entry by Landlord: Tenant shall permit Landlord and his agents to
enter into and upon said Premises at all reasonable times subject to any
security regulations of Tenant for the purpose of inspecting the same or for
the purpose of maintaining the Premises or for the purpose of making repairs,
alterations or additions to any other portion of said Premises or for the
purpose of erecting additional building(s) and improvements on the land where
the Premises are situated, or on adjacent land owned by Landlord, including
the erection and maintenance of such scaffolding, canopies, fences and props
as may be required without any abatement or reduction of Base Monthly Rent or
without any liability to Tenant for any loss of occupation or quiet enjoyment
of the Premises thereby occasioned; and Tenant shall permit Landlord and his
agents, at any time within one hundred eighty (180) days prior to the
Expiration Date (or at any time during the Lease if Tenant is in default
hereunder), to place upon the Premises any "For Sale" or "For Lease" signs
and exhibit the Premises to real estate brokers and prospective tenants at
reasonable hours. Landlord shall comply with Tenant's security procedures
applicable to the Premises and shall not unreasonably interfere with Tenant's
use of the Premises.
27. Destruction of Premises:
A. Destruction by an Insured Casualty: In the event of a
partial destruction of the Premises by a casualty for which Landlord has
received insurance proceeds sufficient to repair the damage or destruction
during the Lease Term from any cause, Landlord shall forthwith repair the
same, provided such repairs can be made within one hundred eighty (180) days
from the date of receipt of all necessary governmental approvals necessary
under the laws and regulations of State, Federal, County or Municipal
authorities, such partial destruction shall in no
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way annul or void this Lease, except that Tenant shall be entitled to a
proportionate reduction of Base Monthly Rent while such repairs are being
made, such proportionate reduction to be based upon the extent to which the
making of such repairs shall interfere with the business carried on by Tenant
in the Premises. For purposes of this paragraph "partial destruction" shall
mean destruction of no greater than one-third (1/3) of the replacement cost
of the Premises, including the replacement cost of the Tenant Improvements
paid for by Landlord. In the event the Premises are more than partially
destroyed, or in the event the repairs cannot be made in one hundred eighty
(180) days, Landlord or Tenant may elect to terminate this Lease. Landlord
shall not be required to restore Alterations or replace Tenant's fixtures or
personal property. In respect to any partial destruction which Landlord is
obligated to repair or may elect to repair under the terms of this paragraph,
the provision of Section 1932, Subdivision 2, and of Section 1933,
Subdivision 4, of the Civil Code of the State of California and any other
similarly enacted statue are waived by Tenant and the provisions of this
paragraph 28 shall govern in the case of such destruction.
B. Destruction by an Uninsured Casualty: In the event of a
total or partial destruction of the Premises by an uninsured casualty, the
Lease shall automatically terminate, unless Landlord elects to rebuild. In
the event of a destruction by an uninsured casualty (i) of greater than
one-third (1/3) of the replacement cost of the Premises, or (ii) that can not
be repaired within one hundred eighty (180) days, Tenant may elect to
terminate this Lease.
28. Assignment or Sublease:
A. Consent by Landlord: In the event Tenant desires to assign
this Lease or any interest therein including, without limitation, a pledge,
mortgage or other hypothecation, or sublet the Premises or any part thereof,
Tenant shall deliver to Landlord substantially complete forms of any such
agreement and of all ancillary agreements with the proposed assignee or
subtenant, financial statements, and any additional information as reasonably
required to determine whether it will consent to the proposed assignment or
sublease. The notice shall give the name and current address of the proposed
assignee/subtenant, proposed use of the Premises, rental rate and current
financial statement; and upon request to Tenant, Landlord shall be given
additional information as reasonably required to determine whether it will
consent to the proposed assignment or sublease. Landlord shall then have a
period of ten (10) days following receipt of such notice within which to
notify Tenant in writing that Landlord elects (i) to terminate this Lease as
to the space so affected as of the date so specified by Tenant in which event
Tenant will be relieved of all further obligations hereunder as to such space
(in which case Landlord shall be responsible for the payment of any real
estate commissions due), (ii) to permit Tenant to assign or sublet such space
to the named assignee/subtenant on the terms and conditions set forth in the
notice, or (iii) to refuse consent. If Landlord should fail to notify Tenant
in writing of such election within said ten (10) day period, Landlord shall
be deemed to have elected option (ii) above. If Landlord exercises its
option to terminate this Lease in part in the event Tenant desires to sublet
or assign part of the Premises, then (i) this Lease shall end and expire,
with respect to such part of the Premises, on the date upon which the
proposed sublease was to commence, and (ii) from and after such date, the
Base Monthly Rent and Tenant's allocable share of all other costs and charges
shall be adjusted, based upon the proportion that the rentable area of the
Premises remaining bears to the total rentable area of the Premises. If
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Landlord does not exercise its option to terminate this Lease, Landlord's
consent (which must be in writing and in form reasonably satisfactory to
Landlord) to the proposed assignment or sublease shall not be unreasonably
withheld or delayed, provided and upon condition that: (i) The proposed
assignee or subtenant is engaged in a business that is limited to the use
expressly permitted under this Lease; (ii) The proposed sublease shall be in
form reasonably satisfactory to Landlord; (iii) Tenant shall reimburse
Landlord on demand for any costs that may be incurred by Landlord in
connection with said assignment or sublease, including the costs of making
investigations as to the acceptability of the proposed assignee or subtenant
and legal costs incurred in connection with the granting of any requested
consent; and (iv) Tenant shall not have advertised or publicized in any way
the availability of the Premises without prior notice to Landlord.
Notwithstanding the provisions of this paragraph 28, Tenant may, without
Landlord's prior written consent and without Landlord's participation in
subleasing profits, sublet the Premises or assign the Lease to: (i) a
subsidiary, affiliate, division or corporation controlled or under common
control with Tenant; (ii) a successor corporation related to Tenant by
merger, consolidation, non-bankruptcy reorganization, or government action;
or (iii) a purchaser of substantially all of Tenant's assets. For the
purpose of this Lease, sale of Tenant's capital stock through any public
exchange shall not be deemed an assignment, subletting, or any other transfer
of the Lease or the Premises.
B. Assignment or Subletting Consideration: Any rent or other
economic consideration realized by Tenant under any such sublease and
assignment in excess of the rent payable hereunder (including an allocation
of the purchase price attributable to Tenant's leasehold interest in the
event of a sale of the Tenant's business), after the net unamortized cost of
the Tenant Improvements for which Tenant has itself paid, and reasonable
subletting and assignment costs, shall be divided and paid sixty-seven
percent (67%) to Landlord and thirty-three percent (33%) to Tenant. Tenant's
obligation to pay over Landlord's portion of the consideration shall
constitute an obligation for additional rent hereunder. The above provisions
relating to Landlord's right to terminate the Lease and relating to the
allocation of bonus rent are independently negotiated terms of the Lease,
constitute a material inducement for the Landlord to enter into the Lease,
and are agreed as between the parties to be commercially reasonable. No
assignment or subletting by Tenant shall relieve Tenant of any obligation
under this Lease. Any assignment or subletting which conflicts with the
provisions hereof shall be void.
C. No Release: Any assignment or sublease shall be made only if
and shall not be effective until the assignee or subtenant shall execute,
acknowledge and deliver to Landlord an agreement, in form and substance
satisfactory to Landlord, whereby the assignee or subtenant shall assume all
of the obligations of this Lease on the part of Tenant to be performed or
observed and shall be subject to all of the covenants, agreements, terms,
provisions and conditions contained in this Lease. Notwithstanding any such
sublease or assignment and the acceptance of rent or additional rent by
Landlord from any subtenant or assignee, Tenant or any guarantor shall and
will remain fully liable for the payment of the rent and additional rent due,
and to become due hereunder, for the performance of all of the covenants,
agreements, terms, provisions and conditions contained in this Lease on the
part of Tenant to be performed and for all acts and omissions of any
licensee, subtenant, assignee or any other person claiming under or
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through any subtenant that shall be in violation of any of the terms and
conditions of this Lease, and any such violation shall be deemed to be a
violation by Tenant. Tenant shall further indemnify, defend and hold
Landlord harmless from and against any and all losses, liabilities, damages,
costs and expenses (including reasonable attorney fees) resulting from any
claims that may be made against Landlord by the proposed assignee or
subtenant or by any real estate brokers or other persons claiming a
commission or similar compensation in connection with the proposed assignment
or sublease.
D. Effect of Default: In the event of Tenant's default, Tenant
hereby assigns all rents due from any assignment or subletting to Landlord as
security for performance of its obligations under this Lease and Landlord may
collect such rents as Tenant's Attorney-in-Fact, except that Tenant may
collect such rents unless a default occurs as described in paragraph 21
above. The termination of this Lease due to Tenant's default shall not
automatically terminate any assignment or sublease then in existence. At the
election of Landlord, the assignee or subtenant shall attorn to Landlord and
Landlord shall undertake the obligations of the Tenant under the sublease or
assignment; provided the Landlord shall not be liable for prepaid rent,
security deposits or other defaults of the Tenant to the subtenant or
assignee, or any acts or omissions of Tenant, its agents, employees or
invitees.
29. Condemnation: If any part of the Premises shall be taken for any
public or quasi-public use, under any statute or by right of eminent domain
or private purchase in lieu thereof, and a part thereof remains which is
susceptible of occupation hereunder, this Lease shall as to the part so
taken, terminate as of the date title shall vest in the condemnor or
purchaser, and the Base Monthly Rent payable hereunder shall be adjusted so
that the Tenant shall be required to pay for the remainder of the Lease Term
only such portion of such rent as the value of the part remaining after such
taking bears to the value of the entire Premises prior to such taking; but
in such event Landlord shall have the option to terminate this Lease as of
the date when title to the part so taken vests in the condemnor or purchaser.
If all of the Premises, or such part thereof be taken so that there does not
remain a portion susceptible for occupation hereunder, this Lease shall
thereupon terminate. If a part or all of the Premises be taken, all
compensation awarded upon such taking shall go to the Landlord and the Tenant
shall have no claim thereto but Landlord shall cooperate with Tenant to
recover compensation for damage to or taking of any Alterations or for
Tenant's moving costs. Tenant hereby waives the provisions of California
Code of Civil Procedures Section 1265.130 and any other similarly enacted
statue are waived by Tenant and the provisions of this paragraph 30 shall
govern in the case of such destruction.
30. Effects of Conveyance: The term Landlord as used in this Lease,
means only the owner for the time being of the land and Building, containing
the Premises, so that, in the event of any sale or other conveyance of said
land or Building, or in the event of a master Lease of the Building, the
Landlord shall be and hereby is entirely freed and relieved of all covenants
and obligations of the Landlord hereunder, and it shall be deemed and
construed, without further agreement between the parties and the purchaser at
any such sale, or the master tenant of the Building, that the purchaser or
master tenant of the Building has assumed and agreed to carry out any and all
covenants and obligations of the Landlord hereunder. Landlord shall transfer
and deliver Tenant's security deposit, to the purchaser at any such sale or
the master tenant of the
Page 50 of 59
<PAGE>
Building, and thereupon the Landlord shall be discharged from any further
liability in reference thereto.
31. Subordination: In the event Landlord notifies Tenant in writing,
this Lease shall be subordinate to any ground Lease, deed of trust, or other
hypothecation for security now or hereafter placed upon the real property of
which the Premises are a part and to any and all advances made on the
security thereof and to renewals, modifications, replacements and extensions
thereof. Tenant agrees to promptly execute and deliver any documents which
may be required to effectuate such subordination. Notwithstanding such
subordination, Tenant's right to quiet possession of the Premises shall not
be disturbed if Tenant is not in default and so long as Tenant shall pay the
rent and observe and perform all of the provisions of this Lease. At the
request of any lender, Tenant agrees to execute and deliver any reasonable
modifications of this Lease which do not materially adversely affect Tenant's
rights hereunder.
32. Waiver: The waiver by Landlord of any breach of any term,
covenant or condition, herein contained shall not be deemed to be a waiver of
such term, covenant or condition or any subsequent breach of the same or any
other term, covenant or condition herein contained. The subsequent
acceptance of rent hereunder by Landlord shall not be deemed to be a waiver
of any preceding breach by Tenant of any term, covenant or condition of this
Lease, other than the failure of Tenant to pay the particular rental so
accepted, regardless of Landlord's knowledge of such preceding breach at the
time of acceptance of such rent. No delay or omission in the exercise of any
right or remedy by Landlord shall impair such right or remedy or be construed
as a waiver thereof by Landlord. No act or conduct of Landlord, including,
without limitation, the acceptance of keys to the Premises shall constitute
acceptance of the surrender of the Premises by Tenant before the Expiration
Date. Landlord's consent to or approval of any act by Tenant which require
Landlord's consent or approvals shall not be deemed to waive or render
unnecessary Landlord's consent to or approval of any subsequent act by
Tenant.
33. Holding Over: Any holding over after the termination or
Expiration Date, shall be construed to be a tenancy from month to month
terminable on thirty (30) days written notice from either party and Tenant
shall pay Base Monthly Rent to Landlord at a rate equal to the greater of (i)
one hundred fifty percent (150%) of the Base Monthly Rent due in the month
preceding the termination or Expiration Date or (ii) one hundred fifty
percent (150%) of the Fair Market Rental (as defined in paragraph 36). Any
holding over shall otherwise be on the terms and conditions herein specified,
except those provisions relating to the Lease Term and any options to extend
or renew, which provisions shall be of no further force and effect following
the expiration of the applicable exercise period. Tenant shall indemnify,
defend, and hold Landlord harmless from all loss or liability (including,
without limitation, any loss or liability resulted from any claim against
Landlord made by any succeeding tenant) founded on or resulting from Tenant's
failure to surrender the Premises and losses to Landlord due to lost
opportunities to lease the Premises to succeeding tenants.
34. Successors and Assigns: The covenants and conditions herein
contained shall, subject to the provisions of paragraph 27, apply to and bind
the heirs, successors, executors, administrators and assigns of all the
parties hereto; and all of the parties hereto shall be jointly and severally
liable hereunder.
Page 51 of 59
<PAGE>
35. Estoppel Certificates: Tenant shall at any time during the Lease
Term, within ten (10) business days following written notice from Landlord,
execute and deliver to Landlord a statement in writing certifying that this
Lease is unmodified and in full force and effect (or, if modified, stating
the nature of such modification) and the date to which the rent and other
charges are paid in advance, if any, and acknowledging that there are not, to
Tenant's knowledge, any uncured defaults on the part of Landlord hereunder or
specifying such defaults if they are claimed. Any such statement may be
conclusively relied upon by any prospective purchaser or encumbrancer of the
Premises. Tenant's failure to deliver such statement within such time shall
be conclusive upon the Tenant that: (i) this Lease is in full force and
effect, without modification except as may be represented by Landlord; (ii)
there are not uncured defaults in Landlord's performance. Tenant also agrees
to provide the most current three (3) years of audited financial statements
within ten (10) business days of a request by Landlord for Landlord's use in
financing the Premises with commercial lenders.
36. Option to Extend the Lease Term:
A. Grant and Exercise of Option: Landlord hereby grants to
Tenant, upon and subject to the terms and conditions set forth in this
paragraph, the option (the "Option") to extend the Lease Term for an
additional term (the "Option Term"), which Option Term shall be a period of
thirty-six (36) months. The Option Term shall be exercised, if at all, by
written notice to Landlord on or before the date that is nine (9) months
prior to the Expiration Date. If Tenant exercises the Option, each of the
terms, covenants and conditions of this Lease except this paragraph shall
apply during the Option Term as though the expiration date of the Option Term
was the date originally set forth herein as the Expiration Date, provided
that the Base Monthly Rent to be paid shall be the greater of (i) the Base
Monthly Rent applicable to the period immediately prior to the commencement
of the Option Term, or (ii) the Fair Market Rental, as hereinafter defined,
for the Premises for the Option Term. Anything contained herein to the
contrary notwithstanding, if Tenant is in monetary or material non-monetary
default under any of the terms, covenants or conditions of this Lease either
at the time Tenant exercises the Option or at any time thereafter prior to
the commencement date of the Option Term, Landlord shall have, in addition to
all of Landlord's other rights and remedies provided in this Lease, the right
to terminate the Option upon notice to Tenant, in which event the expiration
date of this Lease shall be and remain the Expiration Date. As used herein,
the term "Fair Market Rental" for the Premises shall mean the rental and all
other monetary payments including any escalations and adjustments thereto
(including without limitation Consumer Price Indexing) then being obtained
for new leases of space comparable in age and quality to the Premises in the
locality of the Building that Landlord could obtain during the Option Term
from a third party desiring to lease the Premises for the Option Term. Fair
Market Rental shall further take into account that (i) that Tenant is in
occupancy of the Premises and making functional use of the space in its then
existing condition, and (ii) that no brokerage commission is payable.
B. Determination of Fair Market Rental: If Tenant exercises the
Option, Landlord shall send to Tenant a notice setting forth the Fair Market
Rental for the Premises for the Option Term, on or before the date that is
one hundred fifty (150) days prior to the Expiration Date. If Tenant
disputes Landlord's determination of the Fair Market Rental for the Option
Page 52 of 59
<PAGE>
Term, Tenant shall, within thirty (30) days after the date of Landlord's
notice setting forth the Fair Market Rental for the Option Term, send to
Landlord a notice stating that Tenant either (i) elects to terminate its
exercise of the Option, in which event the Option shall lapse and this Lease
shall terminate on the Expiration Date, or (ii) disagrees with Landlord's
determination of Fair Market Rental for the Option Term and elects to resolve
the disagreement as provided in paragraph 36(C) below. If Tenant does not
send to Landlord a notice as provided in the previous sentence, Landlord's
determination of the Fair Market Rental shall be the basis for determining
the Base Monthly Rent to be paid by Tenant hereunder during the Option Term.
If Tenant elects to resolve the disagreement as provided in paragraph 36(C)
below and such procedures shall not have been concluded prior to the
commencement date of the Option Term, Tenant shall pay Base Monthly Rent to
Landlord hereunder adjusted to reflect the Fair Market Rental as determined
by Landlord in the manner provided above. If the amount of Fair Market Rental
as finally determined pursuant to in paragraph 36(C) below is greater than
Landlord's determination, Tenant shall pay to Landlord the difference between
the amount paid by Tenant and the Fair Market Rental as so determined in
paragraph 36(C) below within thirty (30) days after the determination. If the
Fair Market Rental as finally determined in paragraph 36(C) below is less
than Landlord's determination, the difference between the amount paid by
Tenant and the Fair Market Rental as so determined in paragraph 36(C) below
shall be credited against the next installments of rent due from Tenant to
Landlord hereunder.
C. Resolution of a Disagreement over the Fair Market Rental:
Any disagreement regarding the Fair Market Rental shall be resolved as
follows:
1. Within thirty (30) days after Tenant's response to
Landlord's notice to Tenant of the Fair Market Rental, Landlord and Tenant
shall meet no less than two (2) times, at a mutually agreeable time and
place, to attempt to resolve any such disagreement.
2. If within the thirty (30) day period referred to in (i)
above, Landlord and Tenant can not reach agreement as to the Fair Market
Rental, they shall each select one appraiser to determine the Fair Market
Rental. Each such appraiser shall arrive at a determination of the Fair
Market Rental and submit their conclusions to Landlord and Tenant within
thirty (30) days after the expiration of the thirty (30) day consultation
period described in (i) above.
3. If only one appraisal is submitted within the requisite
time period, it shall be deemed to be the Fair Market Rental. If both
appraisals are submitted within such time period, and if the two appraisals
so submitted differ by less than ten percent (10%) of the higher of the two,
the average of the two shall be the Fair Market Rental. If the two
appraisals differ by more than ten percent (10%) of the higher of the two,
then the two appraisers shall immediately select a third appraiser who shall
within thirty (30) days after his or her selection make a determination of
the Fair Market Rental and submit such determination to Landlord and Tenant.
This third appraisal will then be averaged with the closer of the two
previous appraisals and the result shall be the Fair Market Rental.
4. All appraisers specified pursuant to this paragraph shall
be members of the American Institute of Real Estate Appraisers with not less
than ten (10) years
Page 53 of 59
<PAGE>
experience appraising office and industrial properties in the Santa Clara
Valley. Each party shall pay the cost of the appraiser selected by such
party and one-half of the cost of the third appraiser plus one-half of any
other costs incurred in resolving the dispute pursuant to this paragraph.
37. Options: All Options provided Tenant in this Lease are personal
and granted to original Tenant or its affiliates and are not exercisable by
any third party should Tenant assign or sublet all or a portion of its rights
under this Lease, unless Landlord consents to permit exercise of any option
by any assignee or subtenant, in Landlord's sole discretion. In the event
that Tenant hereunder has any multiple options to extend this Lease, a later
option to extend the Lease cannot be exercised unless the prior option has
been so exercised.
38. Quiet Enjoyment: Upon Tenant's faithful and timely performance of
all the terms and covenants of the Lease, Tenant shall quietly have and hold
the Premises for the Lease Term and any extensions thereof.
39. Brokers: Tenant represents it has not utilized or contacted a
real estate broker or finder with respect to this Lease and Tenant agrees to
indemnify and hold Landlord harmless against any claim, cost, liability or
cause of action asserted by any broker or finder claiming through Tenant.
40. This section intentionally left blank
41. Authority of PARTIES: Each individual executing this Lease on
behalf of Tenant represents and warrants that he is duly authorized to
execute and deliver this Lease on behalf of the corporation, in accordance
with a duly adopted resolution of the Board of Directors of said corporation
or in accordance with the by-laws of said corporation, and that this Lease is
binding upon said corporation in accordance with its terms. Each individual
executing this Lease on behalf of Landlord represents and warrants that he is
duly authorized to execute and deliver this Lease on behalf of the limited
partnership and that this Lease is binding upon said limited partnership in
accordance with its terms.
42. Miscellaneous Provisions:
A. Rent: All monetary sums due from Tenant to Landlord under
this Lease shall be deemed to be rent.
B. Management Fee: All maintenance and utility services
administered by Landlord and subject to reimbursement by Tenant shall include
a property management fee to Landlord of fifteen percent (15%).
C. Performance by Landlord: If Tenant fails to perform any
obligation required under this Lease or by law or governmental regulation,
Landlord in its sole discretion may without notice perform such obligation,
in which event Tenant shall pay Landlord as additional rent all sums paid by
Landlord in connection with such substitute performance within ten (10) days
following Landlord's written notice for such payment.
Page 54 of 59
<PAGE>
D. Interest: All sums due hereunder, including rent and
additional rent, if not paid when due, shall bear interest at the maximum
rate permitted under California law accruing from the date due until the date
paid to Landlord.
E. Rights and Remedies: All rights and remedies hereunder are
cumulative and not alternative to the extent permitted by law and are in
addition to all other rights and remedies in law and in equity.
F. Survival of Indemnities: All indemnification, defense, and
hold harmless obligations of Landlord and Tenant under the Lease shall
survive the expiration or sooner termination of the Lease.
G. Severability: If any term or provision of this Lease is held
unenforceable or invalid by a court of competent jurisdiction, the remainder
of the Lease shall not be invalidated thereby but shall be enforceable in
accordance with its terms, omitting the invalid or unenforceable term.
H. Choice of Law: This Lease shall be governed by and construed
in accordance with California law.
I. Time: Time is of the essence hereunder.
J. Entire Agreement: This instrument contains all of the
agreements and conditions made between the parties hereto and may not be
modified orally or in any other manner than by an agreement in writing signed
by all of the parties hereto or their respective successors in interest.
K. Representations: Tenant acknowledges that neither Landlord
or its affiliates or agents have made any agreements, representations,
warranties or promises with respect to the demised Premises or the Building
of which they are a part, or with respect to present or future rents,
expenses, operations, tenancies or any other matter. Except as herein
expressly set forth herein, Tenant relied on no statement of Landlord or its
agents for that purpose.
L. Headings: The headings or titles to the paragraphs of this
Lease are not a part of this Lease and shall have no effect upon the
construction or interpretation of any part thereof.
Page 55 of 59
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed these presents, the day
and year first above written.
LANDLORD: Sobrato Interests, TENANT: Affymetrix, Inc.
a California limited Partnership a California corporation
BY: /s/ John Michael Sobrato BY: /s/ Stephen P.A. Fodor
------------------------------- -------------------------------
ITS: General Partner ITS: President
------------------------------- -------------------------------
Page 56 of 59
<PAGE>
Exhibit "A"
PREMISES
Diagram of Building Site
Page 57 of 59
<PAGE>
EXHIBIT 11.1
AFFYMETRIX, INC.
STATEMENT OF COMPUTATION OF NET LOSS PER SHARE
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net loss..................................... $ 3,777 $ 2,879 $ 7,698 $ 5,052
------- ------- ------- -------
------- ------- ------- -------
Historical primary and fully diluted
number of shares:
Weighted average common
shares.................................. 6,564 408 3,486 408
Shares related to SAB Topic
4D...................................... 0 7,403 3,702 7,403
------- ------- ------- -------
Shares used in computing net loss
per share.................................. 6,564 7,811 7,188 7,811
------- ------- ------- -------
------- ------- ------- -------
Net loss per share........................... $ (0.58) $ (0.37) $ (1.07) $ (0.65)
------- ------- ------- -------
------- ------- ------- -------
Pro forma number of shares:
Weighted average common
shares.................................. 6,564 408 3,486 408
Shares related to SAB Topic
4D...................................... 0 7,403 3,702 7,403
Convertible preferred shares,
as if converted......................... 11,336 9,853 10,594 9,852
------- ------- ------- -------
Shares used in computing pro
forma loss per share....................... 17,900 17,664 17,782 17,663
------- ------- ------- -------
------- ------- ------- -------
Pro forma net loss per share................. $ (0.21) $ (0.16) $ (0.43) $ (0.29)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Page 58 of 59
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ITEM 1 OF
FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 21,309
<SECURITIES> 92,533
<RECEIVABLES> 1,265
<ALLOWANCES> 0
<INVENTORY> 1,550
<CURRENT-ASSETS> 117,309
<PP&E> 6,001
<DEPRECIATION> (2,149)
<TOTAL-ASSETS> 121,301
<CURRENT-LIABILITIES> 6,246
<BONDS> 0
0
0
<COMMON> 156,529
<OTHER-SE> (42,325)
<TOTAL-LIABILITY-AND-EQUITY> 121,301
<SALES> 457
<TOTAL-REVENUES> 3,715
<CGS> 707
<TOTAL-COSTS> 707
<OTHER-EXPENSES> 8,310
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,154
<INCOME-PRETAX> (7,698)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,698)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,698)
<EPS-PRIMARY> (1.07)
<EPS-DILUTED> (1.07)
</TABLE>
